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The Bank of Japan has maintained its low interest rates, signalling that it will remain in stimulus mode despite mounting speculation in financial markets that an exit from decades of ultra-loose monetary policy was in sight.
In a statement accompanying its decision on Friday, the BoJ noted “extremely high uncertainties” surrounding economies and markets at home and abroad.
Traders in Tokyo said markets would primarily be guided by comments from BoJ governor Kazuo Ueda, who was due to give a press conference on Friday afternoon and explain how the central bank views the fact that consumer price growth has exceeded its 2 per cent target for 17 straight months.
Despite the widely expected no-change outcome from the BoJ’s two-day monetary policy committee meeting, the announcement triggered an immediate sell-off in the yen, which dropped just below ¥148 a dollar within minutes of the decision.
The yen, which pushed even lower to ¥148.18 in the hour that followed, has traded choppily ahead of Friday’s decision as investors bet on the widening interest rate divergence between the hawkish US Federal Reserve and the still-dovish Japanese central bank.
The Fed this week held its benchmark interest rate at 5.25-5.5 per cent, a 22-year high, but signalled more increases to come this year.
Underpinning the yen’s recent moves are growing expectations that Japanese authorities might step in if the currency falls too far, too fast — particularly if it tumbles to the ¥150 mark.
Hirofumi Suzuki, chief foreign exchange strategist at Sumitomo Mitsui Banking, said if the yen continued to weaken, last year’s low of ¥152 could be in sight.
“Of course, there is no way that the BoJ will respond to the weakening yen by raising interest rates or other monetary policy measures, but it will be interesting to see how much caution the BoJ takes with regard to the current financial markets,” said Suzuki.
The central bank also maintained its yield curve control policy, which allows returns on the benchmark 10-year Japanese government bond to move within a tight band around a target of zero.
The BoJ in July allowed that band to widen to 1 per cent, prompting markets to slowly push yields higher. The 10-year bond yield this week reached 0.72 per cent, its highest level since January 2014.
The latest inflation data, released on Friday, underlined the complexity of the BoJ’s policy decisions in coming months.
The “core” annual inflation rate, which excludes volatile fresh food prices, was 3.1 per cent in August, the same as price growth in July. But inflation of the “core-core” index, which strips out energy and fresh food prices, was 4.3 per cent in August, also matching July’s figure.
The “core-core” index is closely scrutinised by the central bank for underlying inflationary trends and is a focus of monetary policy meetings.
“We expect inflation to ease from here, but the pace of deceleration will be slow as past producer price increases are fed through to consumers,” Stefan Angrick, senior economist at Moody’s Analytics, wrote in a note. “All of this complicates the picture for monetary policy.”
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