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The Bank of Japan has held off on lifting negative interest rates, sending the yen lower as its governor said it was in no rush to change its policy before the US Federal Reserve considers cutting rates next year.
At a news conference following the BoJ’s final meeting of 2023, governor Kazuo Ueda acknowledged that the prospect of achieving its inflation target had improved, but cautioned that the Japanese central bank was not ready yet to map out an exit from its ultra-loose monetary policy.
The BoJ’s decision on Tuesday came after the Fed surprised markets last week by signalling that it would cut interest rates next year. That prompted warnings from the European Central Bank and the Bank of England that it was too soon for them to let down their guard against high inflation.
The BoJ, which wants to ensure a lasting end to Japan’s decades of deflation, is the only major central bank to maintain interest rates below zero.
“It is inappropriate to think that we will rush to change our policy because the Fed is likely to move within the next three to six months,” Ueda said, adding that he wanted to assess more data and conduct hearings with companies to confirm the virtuous cycle between wages and prices.
The BoJ kept overnight interest rates at minus 0.1 per cent and made no change to its yield curve controls, after it revised the policy in October to allow yields on 10-year Japanese government bonds to rise above 1 per cent.
While some investors had expected the BoJ to change its forward guidance on rates or offer an indication of an imminent policy change, the central bank stuck to its dovish tone, pledging to stick with its easing measures “as long as it is necessary”.
“For now, it is difficult to lay out with high certainty what kind of measures we will take during an exit,” Ueda said, adding that the BoJ would communicate its stance to investors once there was more clarity.
The yen weakened 1.3 per cent on Tuesday to ¥144.67 against the dollar.
An unwinding of the BoJ’s ultra-loose monetary policy could have major ramifications for international bond and currency markets, especially following the recent volatility in the yen. The Japanese currency is still down 9.5 per cent this year against the dollar, but has pulled back from a historic low of about ¥151 over the past month on expectations of policy tightening.
“The move today [in the yen] is just a short-term reversal, this isn’t the start of a trend,” said Takashi Miwa, chief Japan economist at Nomura. He added that the Japanese currency would get a boost in the first half of next year when Nomura expects the BoJ to end its yield curve controls, “most likely in March or April”.
Most economists had predicted that the BoJ would not make policy changes this week and would wait until there was more evidence of a persistent trend of wage rises.
Japan’s core inflation has exceeded the BoJ’s 2 per cent target since April 2022, but prices are expected to come down next year.
Earlier this month, BoJ governor Kazuo Ueda warned of an “even more challenging year” ahead for policy management, while deputy governor Ryozo Himino appeared to play down possible damage from raising interest rates in a recent speech. Both comments raised expectations the BoJ would soon stop holding interest rates below zero, sending the yen sharply higher.
Nobuyasu Atago, a former BoJ official who is now chief economist at Ichiyoshi Securities, said that Ueda and Himino’s recent comments sent a clear message that they were considering policy change early next year.
“This is a major turning point that a board member has discussed exit strategy,” Atago said, referring to Himino’s speech. “But it’s extremely challenging from here because the BoJ needs to be creative if it wants to offer signals to markets without raising expectations that it will continue raising rates.”
Atago added that he expected the BoJ to lift its negative rate policy in January, but he said it was unlikely that the bank would raise interest rates consecutively considering the impact on regional banks and the JGB market.
