Written by Leika Kihara
TOKYO (Reuters) – The Bank of Japan kept interest rates ultra-low on Thursday and underlined a cautious approach to tapering massive monetary stimulus as political uncertainty and volatile markets clouded the outlook. expected to suggest.
Analysts say the ruling coalition lost its majority in a general election over the weekend, raising concerns about policy paralysis and raising the bar for further interest rate hikes.
The Bank of Japan is unlikely to be in a hurry to raise borrowing costs, as there are few signs of a spike in inflation and Japan’s economic recovery is fragile.
However, if the policy outlook is too dovish, it could give speculators an excuse to sell the yen, accelerating an unwanted currency depreciation.
Conflicting policy demands may prevent the Bank of Japan from giving a clear signal on the timing or pace of further rate hikes, especially ahead of the Nov. 5 U.S. presidential election.
“Domestic political turmoil is negative for economic activity and could be a headwind for the Bank of Japan’s rate hike plans,” said Naomi Muguruma, chief fixed income strategist at Mitsubishi UFJ (NYSE:) Morgan Stanley Securities.
“However, if the yen’s depreciation accelerates and upside risks to inflation resurface, the BOJ may not be able to afford to wait too long,” he said.
The Bank of Japan is widely expected to keep short-term interest rates unchanged at 0.25% at its two-day meeting ending on Thursday.
In its quarterly report to be released after the meeting, the board is expected to make no major changes to its forecast for inflation to remain around 2% until early 2027.
Markets will instead focus on the Bank of Japan’s view of risks, as Governor Kazuo Ueda has highlighted volatile markets and fears of a U.S. economic recession as the main reasons for the slow pace of rate hikes.
After meeting with officials from major economies in Washington, Ueda expressed cautious optimism about the outlook for the global economy. He is scheduled to hold a press conference on Thursday at 3:30 pm (6:30 pm Japan time) to explain the Bank of Japan’s policy decisions.
Mari Iwashita, a veteran BOJ watcher, said, “Mr. Ueda may still be taking a cautious stance on the U.S. economy, but he is trying to convey that the BOJ’s policy of raising interest rates remains intact to avoid further yen depreciation.” I will try my best,” he said.
The Bank of Japan could also remove hints by amending the section of the report regarding future policy guidance. In its latest report released in July, the Bank of Japan stated that it would continue raising interest rates if economic and price conditions continue as expected.
The board is likely to discuss whether the guidance should include additional language on risks and triggers for policy change, sources told Reuters.
The Bank of Japan ended negative interest rates in March and raised short-term interest rates to 0.25% in July, believing that Japan is making progress toward sustainably achieving its 2% inflation target.
Japan’s factory output and retail sales rose in September, data released Thursday showed, suggesting the economy is on track for a gradual recovery.
Ueda reiterated that the Bank of Japan will continue to raise interest rates if the economy performs as expected. But he also said the central bank was in no hurry as inflation remained moderate.
A Reuters poll found that a small majority of economists expect no interest rate hike this year, but most expect it to happen by March.
