BoJ leaves rates unchanged, cuts inflation forecasts

(Sharecast News) - The Bank of Japan kept interest rates in negative territory as expected on Tuesday, but reduced its forecasts for inflation this year on the back of falling oil prices. The central bank left its short-term interest rate at -0.1%, as widely predicted by economists, and said it would keep purchasing a Japanese government bonds to keep 10-year yields at around 0% with an upper bound of 1%.

"With extremely high uncertainties surrounding economies and financial markets at home and abroad, the Bank will patiently continue with monetary easing while nimbly responding to developments in economic activity and prices as well as financial conditions. By doing so, it will aim to achieve the price stability target of 2% in a sustainable and stable manner, accompanied by wage increases," the BoJ said in a statement.

The BoJ is expected to wait for results from Spring wage negotiations before deciding how to change monetary policy, with most analysts predicting a rate hike in April. Expectations for more imminent tightening were pushed back earlier this month following the New Year's Day earthquake.

Even after a potential hike, Oxford Economics said it expects the BoJ to keep an effective zero-interest rate policy for a few years, given that achieving the 2% inflation target won't yet be in sight.

The annual inflation rate eased to 2.6% in December from 2.8% the month before, marking the lowest growth in year-on-year consumer prices since July 2022.

The BoJ said it now expects inflation to slow to 2.4% in the financial year ending March 2025, down from an earlier projection of 2.8%, easing to 1.8% the following year.

"We maintain our view that the BoJ will abolish its negative interest rate policy (NIRP) at the April meeting, after confirming the wage settlement," said Oxford Economics senior economist Norihiro Yamaguchi.

"The bank will likely argue that the economy is on track to achieve 2% inflation, but it will take several years. Thus, they will stress that the end of NIRP is not tightening - rather, it strengthens monetary easing by enhancing financial intermediation in money markets."

Similarly, Ipek Ozkardeskaya, senior analyst at Swissquote Bank, said the central bank can afford to stand pat for a while. "Lowering inflation forecasts highlights that there is no emergency to make any changes to the BoJ policy, even less so after a powerful earthquake hit the island at the very beginning of the year," said Ozkardeskaya. "On the contrary, if inflation - which is the bad side of low rates - is under control, the bank would do better to keep the rates low and its economy supported."