The Bank of Japan maintained ultra-low interest rates and its guidance to keep borrowing costs at “present or lower” levels. Signaling its resolve to focus on supporting the economy’s tepid recovery from the COVID-19 pandemic.
At the two-day policy meeting the BOJ maintained its -0.1% target for short-term rates. And its pledge to guide the 10-year yield around 0% by a 8-1 vote. The decision was widely expected, but leaves the BOJ’s stance even more at odds with other major central banks.
The yen tumbled as much as 1.7% and the benchmark 10-year Japanese government bond (JGB) yield fell. After the BOJ’s policy decision to remain a dovish outlier.
CAUGHT IN DILEMMA
Central banks across Europe raised interest rates, some by amounts that shocked markets, in the wake of the U.S. Federal Reserve’s 75-basis-point hike. A surprise move by the Swiss National Bank left the BOJ the world’s last dovish major central bank.
The growing monetary policy divergence between Japan and the rest of the world has pushed the yen to 24-year lows. Threatening to cool consumption by boosting already rising import costs.
The government and the BOJ have escalated their warnings against sharp yen falls. Including by issuing a joint statement last week signalling readiness to step into the currency market if necessary.
Such concerns over the weak yen, however, have not deterred the BOJ from defending an implicit 0.25% cap.
The BOJ is caught in a dilemma. With Japan’s inflation well below that of Western economies, its focus is to support the stil-weak economy with low rates. But the dovish policy has triggered sharp yen falls, hurting an economy heavily reliant on fuel and raw material imports.
-Reuters.
