The Bank of Japan (BOJ) maintained its short-term interest rate target at 0.25% at its policy meeting today, while signaling increased confidence in the economic outlook that could pave the way for further monetary tightening as early as December.
Link to the Bank of Japan’s official statement and economic outlook
Key points from the Bank of Japan statement:
- The short-term interest rate stabilized at 0.25%.
- Core inflation expectations for fiscal year 2025 shrank to 1.9% from 2.1%.
- The Bank of Japan expects inflation to remain at around 1.9% during fiscal year 2026
- Economic growth expectations were maintained at 0.6% for the current fiscal year
- Growth expectations of 1.1% and 1.0% for fiscal years 2025 and 2026, respectively.
A major shift in communications
In a marked departure from previous messages, Governor Kazuo Ueda abandoned the central bank’s previous stance that it could “take time” in assessing risks. Instead, he struck a more optimistic tone, especially regarding the external threats facing the Japanese economy.
“Looking at the domestic data, wages and prices are moving in line with our expectations. As for the downside risks facing the US and external economies, we see the clouds as somewhat clear,” Ueda said during the post-meeting press conference.
Japanese Yen against major currencies: 5 minutes
The Japanese yen responded strongly to both the policy announcement and the subsequent press conference, rising on both events as traders took both events (particularly the governor’s less dovish tone on the economic outlook) as fuel to price in the prospects of a 2018 Bank of Japan rate hike. December.
The movement peaked during the mid-morning session in London and reversed to pre-press conference levels and below. This may be a reaction to BOJ Ueda’s comments regarding the lack of pre-set expectations for a rate hike. This may have led to profit taking from the event, as well as repositioning ahead of major events during the US session. This is where we saw the bottom of the pullback.
Market focus has shifted and the Japanese yen appears to have benefited significantly from the widespread risk-off sentiment during the US session, driven largely by a round of net positive US economic updates (most notably higher US PCE growth, as well as personal income and spending rates). ).
Concerns about the US elections may also be a factor in the shift towards risk aversion as we approach the November 5 event.
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