Bank of Japan holds rates of interest and upgrades consumption outlook | USAEMALL.com

Unlock the Editor’s Digest for free

Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.

The Bank of Japan has opted to hold short-term interest rates, pointing to a moderate recovery in the economy but warning that “high uncertainties” remain in the outlook for activity and prices.

In a widely expected decision on Friday, the BoJ said its two-day monetary policy meeting had concluded in a unanimous decision to maintain the overnight call rate target at 0.25 per cent.

In a statement, it said Japan’s economy was likely to keep growing at a pace above its potential growth rate “as a virtuous cycle from income to spending gradually intensifies”.

But analysts said the Japanese central bank’s bias towards further tightening remained clear, putting it directionally out of step with its counterparts in the US, EU and UK.

In a press conference, BoJ governor Kazuo Ueda said consumption and other data suggested Japan’s economy was moving in line with the bank’s forecasts.

“We might even have upgraded our view on inflation expectations, based on domestic data, but there is now raised uncertainty over the economic outlook in the US,” he said. “That is partially offsetting our optimism on inflation expectations.”

Analysts said Ueda’s comments appeared consistent with a gradual approach from the BoJ, with the governor careful to stress that while the central bank was not on a preset course, if data continue to evolve as expected, further policy rate increases should be expected.

The BoJ’s statement on Friday included an upgrade to its assessment of private consumption, which it said had been on a moderately increasing trend despite the impact of rising prices.

In its previous statement, the BoJ had judged private consumption to be merely “resilient” — a term that Marcel Thieliant, Capital Economics’ head of Asia-Pacific, said was a euphemism, given that the available data showed four consecutive quarter-on-quarter falls in real consumption.

The yen slipped about 0.7 per cent to ¥143.5 against the dollar following Ueda’s statement, as forex traders reacted to his comment that the recent strengthening of the yen had reduced the risk of an inflation overshoot from rising import prices.

“As such, we have some time to decide on policy,” said Ueda, which some interpreted as a suggestion that the BoJ may not raise rates again this year.

The Japanese currency has lurched from about ¥140 to the dollar at the start of the year to a multi-decade low of ¥161 in early July. It has since reversed direction to stand almost flat year-to-date, a scale of volatility that some analysts believe to be a significant factor in the Japanese central bank’s policy decisions.

Still, a majority of economists believe the bank will increase rates again in 2024, with some forecasting a 0.25 percentage point increase as early as next month.

The meeting on Friday was the first since the bank raised rates in late July, pushing monetary policy into “normalisation” after many years of ultra-loose conditions. The BoJ exited negative rates in March, the last central bank in the world to do so, after decades of battling deflation.

Although the BoJ had struck a hawkish tone ahead of the July meeting, the increase to 0.25 per cent took many market participants by surprise, which in addition to a series of other factors including the perceived risk of a US recession, prompted an acute collapse in Japanese stocks and rapid unwinding of the yen “carry trade”.

“The Fed cutting 0.5 per cent this week was fortunate. The yen strengthened temporarily to ¥140 per dollar and has allowed the BoJ to pause and have more time to flag rate rises so there will be no surprises for retail investors next time,” said Neil Newman, head of strategy at Astris Advisory Japan.

In its statement, the BoJ cautioned that it was necessary to pay due attention to developments in financial and foreign exchange markets, saying that “with firms’ behaviour shifting more towards raising wages and prices recently, exchange rate developments are, compared to the past, more likely to affect prices”.

Naomi Fink, chief global strategist at Nikko Asset Management, said the BoJ’s specific reference to foreign exchange and financial markets was noteworthy when considering future moves.

She pointed out that financial market conditions had been a factor in the US Federal Reserve’s decision on Wednesday to cut rates by 50 basis points.

“We may be amid a period of particularly market-aware policy adjustments by central banks,” said Fink, adding that the risk was that central banks might now be underprepared for any unexpected resurgence in inflation.