Bank of Japan Keeps Policy Steady, Awaits More Signs of Inflation

In a two-day policy meeting, the Bank of Japan (BOJ) decided to maintain its current monetary policy, signaling a cautious approach amid the ongoing economic recovery. The central bank, led by Governor Kazuo Ueda, kept its short-term interest rate at -0.1% and maintained its target for the 10-year government bond yield at around 0%.

Despite signs of improvement in the Japanese economy after the pandemic shock, Governor Ueda emphasized the need for careful examination before considering a shift away from the massive stimulus program. He highlighted the importance of observing whether a positive cycle of wage and price increases would take hold.

Ueda acknowledged the recovery from the pandemic shock and noted positive trends in prices and wages. However, he refrained from providing a clear timeline for potential policy adjustments, stating that there would not be much new data available before the next policy meeting on January 22–23.

Market participants, hoping for hints of a near-term exit from negative interest rates, were disappointed as the BOJ maintained its dovish guidance. The central bank reiterated its readiness to ease policy further “without hesitation” if necessary.

Yen Weakens Following Decision By the Bank of Japan

The yen weakened, and Japanese stocks rose in response to the BOJ’s decision, as investors perceived no immediate signals of policy tightening. The central bank’s cautious stance aligns with Japan’s longstanding struggle against deflation, despite aggressive monetary easing.

While a Reuters poll in November suggested that over 80% of economists anticipate the BOJ ending its negative rate policy next year, Governor Ueda did not provide a clear indication of the timing. He emphasized the high uncertainty in the economic outlook and the need to see inflation stably and sustainably achieve the BOJ’s 2% target.

As Japan navigates its economic recovery, analysts warn that the BOJ’s exit strategy could face complications, particularly if weak consumer spending persists. The central bank, however, remains optimistic about consumption, stating that it continues to increase moderately and reaffirming its view that the economy is on a recovery path.