The Bank of Japan maintained ultra-easy monetary policy today despite stronger-than-expected inflation, signalling it will remain a dovish outlier among global central banks and focus on supporting a fragile economic recovery.
The central bank also kept intact its view that inflation will slow later this year and a pledge to "patiently" sustain massive stimulus, reinforcing Governor Kazuo Ueda's recent message that it will be in no rush to phase out stimulus.
The BOJ's decision contrasts sharply with that of the European Central Bank, which raised borrowing costs to a 22-year high on Thursday and signalled the likelihood of further hikes. Also this week, the U.S. Federal Reserve on Wednesday signalled it was not yet done with its fight against inflation.
"Despite upside surprises on the growth and inflation fronts, we believe the BOJ will maintain the status quo for another year or so to assess whether the economy is on track to achieving 2% inflation within Governor Ueda's five-year term," said Shigeto Nagai, head of Japan Economics at Oxford Economics.
As widely expected, the BOJ maintained its -0.1% short-term interest rate target and a 0% cap on the 10-year bond yield set under its yield curve control (YCC) policy.
"Uncertainty regarding Japan's economy is very high," the BOJ said in a statement announcing the decision. The bank added it expected core consumer inflation to slow by October.
The yen fell 0.3% against the dollar to 140.72 JPY=EBS and tumbled to a fresh 15-year low of 153.925 EURJPY=EBS against the euro after the announcement. Japan's benchmark 10-year government bond yield fell to 0.4% after the decision, well off the implicit 0.5% cap set for the maturity.
Markets are focusing on Ueda's post-meeting news conference for hints on how soon the BOJ could tweak YCC and his views on the yen's renewed declines, which work to push up import costs.
"The BOJ is not in a hurry to tweak policy on the view the side-effects of YCC aren't so large," said Izuru Kato, chief economist at Totan Research.
"But it may be forced to act if the yen weakens further and drives up import costs, angering the public. The trigger for a YCC shift could be a sharp yen fall."
Already, the yen's renewed decline has drawn a verbal warning from Finance Minister Shunichi Suzuki, who told reporters on Friday excessive currency volatility was undesirable.
