Bank of Japan Maintains Ultra-Loose Policy Amid Uncertain Economic Outlook

The Bank of Japan (BOJ) announced today its decision to maintain ultra-loose policy settings, including the closely watched yield curve control (YCC) policy. The move comes as the central bank aims to support the nascent economic recovery and work towards achieving its inflation goal in a sustainable manner. Consequently, the Japanese yen experienced a slight decrease in value against the US dollar.

As anticipated, the BOJ opted to sustain its current ultra-easy monetary policy during Friday’s meeting. Governor Kazuo Ueda had previously stated that the central bank would patiently persevere with this approach, acknowledging that further progress is necessary to attain the stable and sustainable 2% inflation target. The BOJ emphasized the highly uncertain nature of Japan’s economy.

Governor Ueda also mentioned expectations of inflation dipping below 2% in the middle of the current fiscal year, followed by a subsequent rebound. Additionally, he noted that changes in corporate price-setting behavior might contribute to inflation exceeding projections.

April Inflation Surpasses 2% Bank of Japan Target Band

April witnessed Japan’s core inflation rise to 3.4%, surpassing the BOJ’s 2% target. This development suggests that adjustments to the YCC policy may be on the horizon.

source: tradingeconomics.com

The BOJ had previously eliminated its longstanding forward guidance in April, demonstrating its ability to adapt to economic activity and price fluctuations. Consequently, the upcoming July 28 meeting is anticipated to be significant.

Japanese Yen Shows Slight Decline Against US Dollar

The Japanese yen experienced a modest decline against the US dollar, partly due to the currency’s low yield and the expectation of higher interest rates in the United States. Moreover, alleviated concerns regarding a harsh economic downturn in the US and the continued hawkish stance of global central banks have further contributed to the overall bearish sentiment.

However, the yen’s depreciation appears more evident when compared to currencies of countries where central banks are actively raising interest rates, such as the Reserve Bank of Australia (RBA), the Bank of Canada (BOC), the Bank of England (BOE), and the European Central Bank (ECB).

Conversely, the yen’s weakening trend is less pronounced against the currencies of central banks that have paused rate hikes (e.g., the Federal Reserve) or signaled that rates have reached their peak (e.g., the New Zealand dollar).