The Bank of Japan decided not to drop its ultra-loose monetary policy on Friday and downgraded its view on inflation in a fresh hit to its long-standing 2 percent price goal, further convoluting the central bank’s path to rolling back its extreme monetary stimulus.
Markets are currently on the watch for clues from BOJ Governor Haruhiko Kuroda’s post-meeting statement on how long the central bank could hold off on stepping back from crisis-mode stimulus, given the latest disappointingly soft price growth.
As the majority of the market expected, the Bank of Japan maintained its short-term interest rate target at negative 0.1 percent and a pledge to guide 10-year government bond yields near zero percent.
The move is a direct contrast to the European Central Bank’s decision to cut its asset-purchase program this year, as well as to the US Federal Reserve’s steady rate increases, which implied a break from the policies that were used to battle the 2007-2009 financial crisis.
“Consumer price growth is in a range of 0.5 to 1 percent,” said the BOJ in a statement that came along with the decision. It was a slightly softer view than during the previous meeting in April, in which the bank said that inflation was speeding around 1 percent.
The BOJ remained firm on its view that the economy was expanding moderately, unharmed by a first quarter contraction that many analysts attributed to temporary factors like weather.
On the other hand, it also retained its careful assessment on prospects for hitting its slick 2 percent inflation target, stating that inflation expectations were moving sideways.
The central bank stated that it will continue buying bonds so that the balance of its holdings increases at a yearly pace of 80 trillion yen, which is equivalent to $722.67 billion.
The delay in the backing down from the crisis-era stimulus would make the BOJ near powerless and unable to combat in case another economic downturn hits the country, even if its European and US peers begin restocking their ammunition.
“It’s almost certain the BOJ will cut its inflation forecasts at its next meeting in July,” stated Hiroshi Miyazaki. In that meeting to be held in July, the bank will conduct a quarterly review of its projections. Miyazaki is a senior economist at Mitshubishi UFJ Morgan Stanley Securities.
“The BOJ is already stealth tapering and it wants to sound out markets for an exit, but it may have to wait until inflation gets above at least 1 percent,” he added.