BoJ keeps policy unchanged after Fed adds dovish tint to outlook

By BLOOMBERG

TOKYO • The Bank of Japan (BoJ) left its stimulus settings unchanged at its final policy meeting of the year in the face of rising risks to inflation, just hours after the US Federal Reserve (Fed) signalled a slightly more dovish rate path.

The BoJ kept its yield curve-control programme and asset purchases unchanged, it said in a statement yesterday, a result predicted by all 49 economists surveyed by Bloomberg.

The central bank faces a deteriorating environment. With oil prices tumbling, economists see inflation falling toward zero in the year ahead. Slowing growth in China, the US-China trade war and a disruptive Brexit could all hit Japan’s export-dependent economy, which has contracted in two of the past three quarters.

Governor Haruhiko Kuroda acknowledged that risks tilted to the downside, while arguing that Japan’s economic fundamentals remain solid and momentum toward the 2% price target is maintained.

Speaking at a press conference later, Kuroda also said the BoJ has more tools for adding stimulus if needed — including rate cuts and asset purchases — and that it’s no problem if government bond yields fall into negative territory, so long as the move reflects economic fundamentals and yields remain within the BoJ’s target range.

Japanese stocks entered a bear market yesterday, with the Topix Index falling another 2.5% as statements from the BoJ and Fed failed to soothe investors. Benchmark 10-year bond yields this week fell to 0.01%, the lowest since September 2017.

While the BoJ officials may be fine with yields hitting zero percent or below, sub-zero yields for an extended period would again elevate concerns about profits at Japanese banks.

Eroded bank profitability was a key reason the BoJ introduced yield curve control in 2016.

The BoJ repeated its previous assessment that Japan’s economy is likely to continue expanding moderately, supported by moderate growth in exports and an uptrend in domestic demand. Core inflation is currently around 1%, and likely to increase gradually toward 2%, it said.

“With a rising level of cautiousness, which was shared by the Fed, the BoJ will be in waitand- see mode for a while,” said Junko Nishioka, chief Japan economist at Sumitomo Mitsui Banking Corp and a former BOJ official. “They are well aware that it’s not time to signal any policy normalisation.”

The vote on the rate decision was 7-2, with Goushi Kataoka and Yutaka Harada dissenting.

Kataoka again argued that heightening uncertainties regarding economic activity and prices warranted action to push long-term yields lower.

Harada said the trading range for yields was too ambiguous a guide for market operations.

After more than five years and US$3.5 trillion (RM14.6 trillion) of asset purchases, inflation remains only halfway to the BoJ’s goal, as wage growth remains stubbornly sluggish.

The Fed’s more cautious stance on future rate increases will complicate matters for the BoJ, which must be mindful that any clear signal of policy normalisation, particularly if the Fed seems poised to hit pause, could cause the yen to quickly gain unwanted strength.

Compared to October, fewer economists now expect tightening of policy next year, the Bloomberg survey found.