Bank of Japan Maintains Low-Interest Policy

The Bank of Japan (BOJ) decided to keep its benchmark policy rate at 0%-0.1% during its monetary policy meeting on Friday. This decision, which aligns with economists’ expectations, comes after Tokyo’s inflation for April fell below projections. The core inflation rate stood at 1.6%, significantly lower than the 2.2% expected.

The BOJ also confirmed that it will continue its bond purchasing program in line with previous policy. Since March, the bank has been buying about six trillion yen ($83.5 billion) worth of bonds per month. However, no comments were made about the yen in the BOJ’s statement, despite its continued weakening since the BOJ ended its negative interest rate policy and abolished its yield curve control policy last month.

Following the monetary policy announcement, the yen dropped further, breaking through the 156 mark against the U.S. dollar, settling at 156.7 by Friday. During a press conference, BOJ Governor Kazuo Ueda emphasised that while the bank’s monetary policy does not specifically target currency rates, exchange rate volatility could significantly impact Japan’s economy and price levels. He added that if the yen’s movements adversely affect the economy and prices, it might prompt the BOJ to adjust its policy.

Regarding inflation, the BOJ released its second-quarter outlook, raising its inflation forecast for fiscal 2024 to a range of 2.5% to 3%, an increase from its January prediction of 2.2% to 2.5%. The central bank anticipates inflation to decline to “around 2%” in fiscal 2025 and 2026.

On the other hand, the BOJ revised its gross domestic product (GDP) growth forecasts for fiscal 2024 down to a range of 0.7% to 1%, from the January estimate of 1%-1.2% growth.

Despite this, the BOJ signalled its intent to maintain accommodative monetary policies in the near term, indicating that future policy adjustments would depend on the evolving economic and price conditions. Governor Ueda stated that uncertainties remain high regarding both domestic and international economic and financial developments, suggesting that policy adjustments would be based on a broader understanding of underlying inflation and other economic indicators.

The BOJ’s cautious approach underscores the ongoing economic uncertainty and the challenges posed by fluctuations in inflation and currency rates. Although the central bank continues to promote financial stability, the weakening yen and changing inflation dynamics could compel the BOJ to reassess its current strategy.