BOJ keeps monetary policy steady as global tensions escalate

The Bank of Japan (BOJ) kept monetary policy steady on Thursday but Governor Haruhiko Kuroda signalled readiness to ramp up stimulus as global risks cloud the economic outlook, joining US and European central banks in dropping hints of additional easing.

Seeking to dispel concerns the BOJ has run out of ammunition, Kuroda said the central bank could combine interest rate cuts with bigger asset buying if needed to keep the economy on track to achieve its elusive 2 per cent inflation target.

“If the economy loses momentum toward achieving our price target, we’ll of course consider expanding stimulus without hesitation,” he told a news conference.

The BOJ joined central banks across the world that are shifting towards easing policy as the escalating US-China trade war adds pressure on the slowing global economy.

The US Federal Reserve kept rates steady on Wednesday but signalled it was ready to cut rates beginning as early as next month. Central banks of Australia, the Philippines and Indonesia also hinted at the chance of lower rates.

“There’s a good chance the Fed will cut rates in July. If that happens, the BOJ will strengthen its forward guidance to keep yen rises in check,” said Izuru Kato, chief economist at Totan Research.

As widely expected, the BOJ maintained its short-term rate target at -0.1% and a pledge to guide 10-year government bond yields around zero per cent.

It also kept intact a loose pledge to keep buying government bonds so the balance of its holdings increase by roughly 80 trillion yen ($738 billion) per year.

“Downside risks regarding overseas economies are big, so we must carefully watch how they affect Japan’s corporate and household sentiment,” the BOJ said in a statement announcing the policy decision.

The Fed’s dovish outlook saw the dollar skid to a six-month low against the yen on Thursday, adding to headaches for Japanese policymakers who worry a stronger yen could inflict more pain on the export-reliant economy.

The BOJ is in a bind. Stubbornly weak inflation has forced it to maintain massive stimulus even as years of ultra-low rates hurt financial institutions’ profits.

Despite Kuroda’s remarks, many analysts say the BOJ has little ammunition left to fight another recession, with rates already below zero and its huge buying drying up bond market liquidity. Japan’s 10-year government bond yields slid to a three-year low of minus 0.160% on Thursday, approaching the minus 0.2% floor of a range the BOJ had said would be acceptable.

Kuroda said the BOJ would not persist in keeping yields in a narrow range, but added that it will take necessary steps if the central bank deemed the yield curve as flattening too much.

“If we were to ease, we would ensure that the costs are at a minimum, and the net effect of stimulus is at the largest,” he said in a sign the rising cost of prolonged easing could constrain future monetary easing steps.

Yen moves have always been crucial in the BOJ’s policy thinking. A recent Reuters poll showed most economists saw a yen rise above 100 to the dollar as a trigger for more easing. The dollar stood around 107.80 yen on Thursday.

“We believe the BoJ will lower policy rates only reluctantly when the yen appreciates more significantly and will, if at all possible, try to maintain the status quo by only adjusting its forward guidance,” analysts at Oxford Economics wrote in a research note.

At its previous rate review in April, the BOJ adopted a forward guidance that pledges to keep current ultra-low rates at least until around spring of next year.

Japan’s economy expanded by an annualised 2.1% in January-March but many analysts predict the pace will slow in coming quarters as global fallout from the US-China trade row grows. A scheduled sales tax hike in October may also curb consumption.

Annual core consumer inflation hit 0.9% in April, still far from the BOJ’s 2% target, despite years of radical stimulus.

Meanwhile, Japan’s Nikkei ended at a fresh six-week high on Thursday after the US Federal Reserve signalled it was ready to cut interest rates to support the economy, but gains were capped by a stronger yen.

The Nikkei share average rose 0.6% to 21,462.86 points, extending gains from a 1.7% rise on Wednesday.

The Fed said that it was ready to battle growing global and domestic economic risks, with rate cuts possibly as early as next month.

“The dovish Fed message is supporting sentiment and the market is relieved for now,” said Takashi Ito, an equity market strategist at Nomura Securities.

But Ito added that for Japan, a stronger yen would limit the upside. A stronger yen erodes Japanese manufacturers’ profits made abroad when repatriated.

Reuters