BoJ keeps stimulus unchanged with nod to inflation progress

Governor Haruhiko Kuroda said the central bank wasn’t in a position to consider exiting its current policy after the board voted 8-1 to keep interest rates and asset purchases at current levels.

Inflation expectations remain more or less unchanged, versus a previous assessment that they were weakening, the BoJ said, though risks to prices remain "skewed to the downside."

The yen, which had strengthened as the market reacted to the BoJ’s view of price expectations, weakened after Kuroda’s comments. It traded at 111.15 against the dollar as of 3:45 pm in Tokyo. The governor said the BoJ is watching the currency market closely.

The central bank forecast the economy to grow 1.4% in the fiscal year starting in April, with inflation of 1.4% over the same period.

With the economy growing and inflation slowly but steadily rising, some investors had started to bet that the BoJ is nearing the point where it begins to normalise its ultra-loose monetary policy. The yen gained strength after the BoJ cut its bond purchases earlier this month.

What Bloomberg economist says ...

The yen’s rise after the Bank of Japan kept policy unchanged reinforces Bloomberg Economics’ view that Kuroda’s main task Tuesday is to damp expectations for near-term tightening. ... Kuroda’s most important job may be to keep premature market anticipation of tightening from pushing the economy off course.  Yuki Masujima, Bloomberg Economic.

"The decision makes it clear that the BoJ doesn’t want any noise about early tightening now," said Hiromichi Shirakawa, chief Japan economist at Credit Suisse and a former BoJ official. "The BoJ could have raised its growth forecast, given recent economic data, but it didn’t because it’s fearful of fueling speculation of policy normalization." He added that "what they fear most is a strong yen."

Some economists do see tightening on the horizon. Nearly half of those surveyed by Bloomberg said they expected the first move to come later this year.

And even a minority of BOJ policy makers are raising the need for future discussions on normalising policy, though they agree that the stimulus program must continue unchanged for some time, according to people familiar with central bank’s discussions.

‘Bit more time’

The BoJ is lagging behind its global peers in normalising policy after years of unprecedented stimulus. The Federal Reserve is expected to continue raising rates this year, and some European Central Bank officials are calling for the end of asset purchases ahead of a policy meeting later this week. The Bank of Canada raised its overnight rate target last week.

The BoJ appears to be gaining confidence in its view of inflation, but that doesn’t mean a policy change is coming soon, said Maiko Noguchi, a senior economist at Daiwa Securities and a former BoJ official.

"What the BoJ wants to see is inflation, excluding fresh food and energy, steady at around 1%," she said. "I think that will be when talk of policy adjustment comes up. But it will take a bit more time to get there."