(Bloomberg) -- Bank of Japan Governor Kazuo Ueda tamped down speculation of a near-term interest rate hike after the central bank chose to stick with its ultra-easy stimulus, a decision that renewed downward pressure on the yen.
The BOJ kept its negative interest rate and the parameters of its yield curve control program intact on Friday in an outcome predicted by all 46 economists surveyed by Bloomberg. It also maintained a pledge to add to its stimulus without hesitation if needed, a vow that offers yen bears a reason to keep betting against it.
Speaking at a press briefing after the decision, Governor Kazuo Ueda said the distance from being able to adjust the negative rate hasn’t changed much, a comment that suggests a policy pivot isn’t imminent.
“Because we aren’t in a state where inflation accompanied by wage growth — sustainable and stable inflation — is in sight, we’re patiently continuing with monetary easing under the current framework,” he said.
Japan’s currency weakened close to its 10 month-low of 148.46 against the dollar as Ueda spoke, but didn’t show the kind of accelerated losses that sparked intervention by the government a year ago to the day.
The benchmark 10-year bond yield stayed unchanged during the briefing, having regained its 0.745% level after a dip following the BOJ’s decision earlier in the day.
By navigating the press briefing without pushing the yen to a fresh low, Ueda managed to do just enough to balance the need to walk back rate-hike expectations without flooring the currency.
Still the takeaway is that the BOJ will continue its outlier status among central banks of stoking inflation, a stance that looks set to keep the yen in a hole while the Federal Reserve keeps the possibility open of another rate hike to come this year.
Other major economies including the US have been pulling out all the stops to wipe out the inflation of the last couple of years. By contrast, Japan sees the fomenting of stable inflation and wages as a key goal to achieve sustainable economic growth.
“The press conference confirmed that Ueda’s policy stance hasn’t shifted,” said Jin Kenzaki, head of Japan research at Societe Generale SA in Tokyo. “There was no hint of getting more positive about ending the negative rate.”
The currency is now beyond the levels that prompted Japan to intervene in foreign-exchange markets last September. Measured against a broad basket of currencies and adjusted for inflation, it was at its weakest on record in August using data back to 1970.
The Fed’s decision to hold rates and telegraph the likelihood of one more rate hike had pushed the Japanese currency to its 10-month low earlier in the week. The large gap between rates in Japan and the US is one of the main factors driving the yen down against the dollar.
While financial authorities have warned that they are prepared to step into markets again, a message reiterated by both Prime Minister Fumio Kishida and Finance Minister Shunichi Suzuki ahead of the decision, a policy move by the BOJ would likely do more to stem the tide.
Ueda kindled expectations earlier this month about an end to the world’s last negative policy rate when he told local media the chances “aren’t zero” that the BOJ might be able to confirm a virtuous wage-inflation cycle by year-end, a prerequisite for a rate hike.
Ueda said at the briefing that he was simply keeping his options open with that comment in the Yomiuri newspaper.
“If I were to say as a governor that there’s absolutely no chance we could see that possibility by the end of the year, it would in a way create a strong impediment for our discussions,” Ueda said. “Saying that would create a risk.”
The governor declined to give his latest view on when the BOJ might end its negative interest rate.
“The key catalyst for BOJ policy change is whether social behavior changes and people start believing that their wages will continue to rise along with prices,” said Masamichi Adachi, economist at UBS Securities. “I don’t see that kind of change firmly taking place in the next six months or so. That means the BOJ will change policy gradually, too.”
Economic data earlier in the day showed inflation was slightly faster than consensus in August as it hovered above the BOJ’s target for a 17th month, an outcome that casts further doubt on the central bank’s assertion that price growth will slow and that stimulus needs to continue for now.
What Bloomberg Economics Says...
“Importantly, [Ueda] didn’t push back against the yen’s weakness. This suggests he’ll leave the exchange rate to the government and keep monetary policy geared to securing the target of steady 2% inflation. This reinforces our view that the BOJ will stay on hold through the first half of next year.”
— Taro Kimura, economist
To read the full report, click here.
Ueda said inflation would start to slow more clearly while acknowledging that price growth had been stickier than expected. He declined to comment on short-term foreign-exchange movements, but said he was closely watching movements and was in close communication with the government.
“Ueda didn’t make any warning over the yen because it’s not his target and he probably wanted to make it clear that short-term yen moves won’t directly drive BOJ policy,” Kenzaki said. While he expects upward revisions to the BOJ’s inflation view at next month’s meeting, he sees little likelihood of a big change in the pipeline.
For now analysts will have to assume that the BOJ will continue to stick to its own stimulus path even if it keeps hurting the yen.
“The BOJ is the decent-looking wallflower at the school dance — everyone’s waiting for them to bust a move but the reality is they’re waiting for everyone to come to them,” said Calvin Yeoh, money manager at hedge fund Blue Edge Advisors in Singapore.
--With assistance from Sumio Ito, Yoshiaki Nohara, Yuko Takeo, Erica Yokoyama, Masaki Kondo, Aya Wagatsuma and Ruth Carson.
(Adds market reaction, economist comment)
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