The Bank of Japan keeps interest rates stable and emphasizes global risks

But the central bank expects inflation to hover around its 2% target in coming years, underscoring its determination to keep raising borrowing costs if the economy makes a moderate recovery.

Reuters

October 31, 2024, 11:35 am

Last modified: October 31, 2024, 11:37 AM

Bank of Japan Governor Kazuo Ueda and the other members of the central bank’s Policy Board attend the second day of the meeting in Tokyo, Japan, October 31, 2024, in this photo taken by Kyodo. Photo: Mandatory credit Kyodo/via REUTERS

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The Bank of Japan maintained ultra-low interest rates on Thursday and signaled that global economic developments need to be scrutinized. She underlined her focus on the risks to a fragile domestic recovery when deciding on the next policy tightening.

But the central bank predicts inflation will hover around its 2% target in coming years, underscoring its determination to keep raising borrowing costs if the economy makes a moderate recovery.

“The BOJ should pay due attention to the future direction of the overseas economies, especially the US economy, and to developments in the financial markets,” the BOJ said in a quarterly report.

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“It should also be examined how these factors will affect the prospects for Japanese economic activity and prices, the risks associated with them and the likelihood of these prospects being realized.”

The phrases were added to the section of the report explaining the BOJ’s policy guidance, which also reiterated that the bank would continue raising rates if the economy and prices moved in line with its forecasts.

As widely expected, the BOJ held short-term interest rates steady at 0.25% during its two-day meeting that ended Thursday.

The board cut its core consumer inflation forecast for fiscal 2025 to 1.9% from 2.1% in the previous estimate in July, but said risks for that year were tilted to the upside. The core inflation forecast for the 2026 financial year remained unchanged at 1.9%.

Also, core-core inflation, which strips out the impact of fuel costs and is closely watched by the BOJ as a key measure of demand-driven price movements, reached 1.9% in fiscal 2025 and 2.1 in 2026 % – both unchanged. from July.

The yen remained under pressure from the BOJ’s decision to maintain ultra-low interest rates, at 153.34 against the dollar. The yield on ten-year government bonds has changed little after the announcement.

The report reiterated the BOJ’s view that it expects underlying inflation to converge to around 2% sometime in late 2025 or beyond as services prices continue to rise moderately.

“The decision was as expected because it was probably difficult for the BOJ to raise rates at this time. The BOJ is unlikely to be able to change policy until the political situation stabilizes,” said Kazutaka Maeda, an economist at the Meiji Yasuda Research Institute. .

“I still think there is a chance of a rate hike in December,” although the risk of delaying the timing is increasing due to uncertainty over the domestic political situation and the outcome of the U.S. presidential election, he said.

Markets will focus on Governor Kazuo Ueda’s post-meeting briefing, scheduled for 3:30 PM (06:30 GMT), for clues on the timing and pace of further rate hikes.

The BOJ ended negative rates in March and raised short-term rates to 0.25% in July, as Japan made progress toward sustainably reaching its 2% inflation target.

Ueda has repeatedly said the BOJ will continue to raise rates if the economy moves in line with expectations. But he also said the bank was in no hurry as inflation remained subdued.

Data released Thursday showed factory output and retail sales in Japan rose in September, suggesting the economy is on track for a moderate recovery.

The ruling coalition’s loss of a majority in elections this weekend has raised concerns about policy paralysis, which could raise the threshold for additional rate hikes, analysts say.

A slim majority of economists polled by Reuters expect the BOJ to refrain from raising rates this year, although most expect a rate hike in March.