Bank of Japan keeps ultra-low rates, remains global outlier despite sliding yen

TOKYO – The Bank of Japan (BOJ) continued to stand by its ultra low interest rates just hours after the Federal Reserve’s latest rate hike, as it further isolated itself from a global wave of policy tightening and fuelled a slide in the yen to a fresh 24-year low.

 The decision on Thursday came about nine hours after the Fed raised rates by another 75 basis points, keeping pressure on the yen. 

The currency briefly touched 145 against the US dollar immediately after the decision before paring back some of the lost ground. 

BOJ governor Haruhiko Kuroda has repeatedly signalled that there is still a long way to go before policy can be normalised. In sharp contrast with the Fed’s aggressive rate increases, the BOJ’s forward guidance is still flagging the possibility of rates going lower, not higher. 

With little more than six months left in his decade-long run in the top job, the governor seems determined to stick to his task of achieving stable inflation, even as that stance fuels the rapid fall of the yen and forces the bank to buy more bonds to defend its cap on yields.

The yield on 10-year government debt remained at the BOJ’s cap of 0.25 per cent after the decision. The yen and the yield cap are likely to remain under pressure as the tide of global rate hikes continues. 

In a busy week of central bank gatherings, the Bank of England, Norges Bank and Swiss National Bank (SNB) are all seen raising rates later on Thursday.

The expected move by the SNB will leave the BOJ as the last major central bank in the world with a negative interest rate.

The BOJ kept its forward guidance on keeping rates low or lower and repeated its commitment not to hesitate to add easing if needed while watching the economic impact of the pandemic. 

The gathering took place after a series of intensified warnings from Japan’s top officials over the yen. After the currency reached 144.99 earlier in September, Finance Minister Shunichi Suzuki hinted at the possibility of swift currency intervention. The central bank also conducted a check on market rates, a move seen as a precursor to a possible intervention.

Mr Kuroda has so far clearly ruled out the possibility of policy adjustments to stop the yen’s slide. He has repeatedly said the economy needs monetary stimulus until higher wage gains can make the cost-push inflation sustainable. 

That means the BOJ is sticking with its short-term interest rate of minus 0.1 per cent and its cap on long-term bond yields. In the last five working days, the central bank has spent around 2.9 trillion yen (S$28.5 billion) on fixed-rate purchases of bonds to defend the 0.25 per cent cap. 

Mr Kuroda’s unchanging message has convinced an overwhelming majority of economists to expect no policy shift triggered by inflation or the weak yen before he ends his term on April 8. 

Still, BOJ watchers are looking out for any increase in political pressure, as that could be a game changer for monetary policy. Prime Minister Fumio Kishida is set to pick the next central bank chief and two deputy governors, making it hard for the bank to reject government requests, they say. BLOOMBERG