BOJ keeps ultra-low rates, sees inflation staying near the target

The Bank of Japan (BOJ) kept interest rates around zero and highlighted a growing conviction that inflation was on track to durably hit 2 per cent in coming years, signalling its readiness to hike borrowing costs later this year.

But a lack of clear guidance on the future rate hike path triggered a broad-based decline in the yen, pushing it down to a fresh 34-year low past 156 to the dollar and keeping markets on edge over the chance of currency intervention.

The central bank also stuck to its guidance made in March to keep buying government bonds around the current pace, dashing hopes by some traders that it could soon taper purchases partly to slow the yen’s declines.

“The currency takeaway is certainly disappointment from the lack of guidance from the bank,” said Rodrigo Catril, senior FX strategist at National Australia Bank in Sydney.

“To me the currency market is telling us it believes that the Bank of Japan policy is too loose and hence why the currency is so weak. The Bank has the ability to do something about that by changing its policy, and if it’s not going to change the policy, then we shouldn’t expect the yen to strengthen.”

As widely expected, the BOJ maintained its short-term interest rate target at a range of 0-0.1 per cent, which was set just a month ago when it made a historical exit from its massive stimulus programme.

In a sign of its growing confidence on sustainably achieving its price target, the BOJ said in its quarterly outlook report that trend inflation was expected to increase gradually as wages and prices continue to rise in tandem.

“Underlying inflation is likely to be at a level that is generally consistent with our price target” around late 2025 through 2026, the report said.

The assessment compared with the previous report’s view that prospects for achieving 2 per cent inflation were “gradually heightening, albeit with some uncertainties.”

In the quarterly outlook report, the board projected core consumer inflation to hit 2.8 per cent in the year that began in April, before slowing to 1.9 per cent in fiscal 2025 and 2026.

The board expected so-called “core core” index, which excludes the effect of fuel costs, to hit 1.9 per cent in both fiscal 2024 and 2025, before accelerating to 2.1 per cent in 2026.

The projections for “core core” inflation, which is closely watched by the BOJ as an indicator of the broader price trend, for 2024 and 2025 were unchanged from January.

“The forecast, very clearly in the upper 2 per cent range, opens the way to future rate hikes given, of course, that the ‘virtuous circle’ stays intact,” said Naomi Fink, global strategist at Nikko Asset Management.

“The key to the ‘virtuous circle’ remains positive real wages, and higher-than-expected inflation would challenge this virtuous circle. Only in the event inflation is eating into real wages, this is an argument for greater central bank hawkishness,” she said.

Markets are focusing on any hints from Governor Kazuo Ueda’s post-meeting press conference on how the weak yen could affect the next rate hike timing as well as any details on the future of the BOJ’s bond buying programme.

Traders are seeking clarity on how soon the BOJ will start to reduce its bond buying and scale back its massive balance sheet.

In the statement issued on Friday, the BOJ removed reference that it would keep buying government bonds at roughly the current pace around 6 trillion yen ($38.42 billion) per month. Instead, the central bank wrote in the statement that it would “conduct purchases in accordance with the decisions made at the March 2024 policy meeting.”

Recent threats of intervention by Japanese authorities have failed to arrest the yen’s slide against the dollar to levels unseen since 1990, adding to headaches for policymakers worried about the hit to consumption from rising living costs.

Many traders believe there is not much Tokyo can fundamentally do to reverse the currency’s slide with interest rates and momentum heavily skewed against it.

Ueda has said the BOJ could lift rates further if it becomes confident wage gains will broaden and prod firms to hike service prices, thereby kicking off a cycle of wage and price rises.

Underscoring uncertainty over the price outlook, data released on Friday showed Tokyo core inflation, a leading indicator of nationwide figures, slowed much more than expected to slip below the BOJ’s 2 per cent target in April.

Economists polled by Reuters are divided on the timing of the BOJ’s next hike with some betting on action in the third quarter, while others project October-December or beyond.