Bank Of Japan Leaves Policy, Economic Outlook Unchanged

Confirming the expectations of all 41 economists, The Bank of Japan changed absolutely nothing about its monetary policy tonight following The Fed's 3rd rate hike in 11 years. The BOJ said in a statement that it would keep the two key rates at current levels, maintain the pace of its asset purchases, and did not change its economic outlook.

  • The BOJ maintained its short-term policy rate on some bank reserves at -0.1 percent and…
  • left its target for 10-year government bond yields at around 0 percent.
  • It kept the pace of its asset purchases unchanged at about 80 trillion yen ($700 billion) annually.

As Bloomberg reports, with the economy slowly improving and bond yields under control, the BOJ is in position to hold steady for now. But with the Fed rate hike putting upward pressure on yields globally, some economists are looking for signs the BOJ may have to raise its rate targets, particularly if inflation begins to take hold in Japan. “There’s no reason for the BOJ to act now," Hiroshi Ugai, a former BOJ official and chief Japan economist at JPMorgan Chase & Co., said before Thursday’s decision. “The bank will take the U.S. rate hike as good news. What I’m looking for now is any hint of its willingness to raise rates in the future."

For now the reaction is muted and confused (with USDJPY rising – weaker Yen – and stocks up marginally)…

"The BOJ can enjoy smooth sailing for now,” said Mari Iwashita, chief market economist at SMBC Friend Securities.

But the policy divergence will make it more challenging for the BOJ to maintain its target for 10-year government bond yields, and some investors are already speculating that it will have little choice but to raise that target as global yields rise and inflation inches up at home. Kuroda’s comments on this and possible tapering of asset purchases will be scrutinized.

Eleven of 41 economists surveyed by Bloomberg said they expected the BOJ to raise its target rate this year, while 25 predicted the BOJ would cut the pace of its debt buying or stop stating its target for annual purchases.

Kuroda and Deputy Governor Hiroshi Nakaso said last month that it is too early to consider raising rates because inflation remains far from the BOJ’s 2 percent target, underscoring a determination not to repeat the mistake of prematurely tightening seen in 2000 and 2006.

Some BOJ officials are considering whether to give the market further guidance on interest rates once inflation begins picking up, according to people familiar with matter.

“It’s way too early for the BOJ to consider any move,” said Daisuke Karakama, chief market economist at Mizuho Bank Ltd. “They must be hoping this favorable conditions to continue but I don’t think the road to the price target will be all that smooth.”

However, it is notable that there are some risks that The BoJ point out that The Fed seems happy to ignore (as Bloomberg's Colin Simpson notes):

The BOJ doesn't seem to be buying the global reflation story. Perhaps they can see a scenario where the base effect of higher oil prices washes through and the yen starts to creep higher again. Either way, they seem subdued.

 

Timely warning from the BOJ statement following the Fed's rate hike: "Risks to the outlook include the following: developments in the U.S. economy and the impact of its monetary policy on global markets."