Japan sticks to rock-bottom interest rates at the expense of the yen

BOJ Kuroda

TOKYO: Bank of Japan (BoJ) governor Haruhiko Kuroda (pic) emphasised his determination to stick with rock-bottom interest rates even if it means a weaker yen after the bank’s latest price forecasts left the door open to continued speculation over policy change.

Following the central bank’s decision to stand pat earlier in the day, the BoJ looks set to become the last holdout on rates among major developed economies, assuming the European Central Bank goes ahead with its first hike in more than a decade, as is widely expected.

Recent concern that the global economy risks a hard landing as central banks rush to tackle inflation has helped ease market pressure on the BoJ, with fewer speculative bets against the yen and Japanese bonds.

That has left Kuroda with scope to continue with a short-term interest rate of minus 0.1% and a 0.25% cap on 10-year yields even though this combination is contributing to yen weakness.

“We have no intention at all of raising rates under the yield curve control framework,” Kuroda said in a press conference following the bank’s latest decision.

“We also have zero intention of expanding the 0.25% range on either side of the yield target. Right now, we need to continue to tenaciously pursue monetary easing.”

He also flagged the futility of trying to use a marginal rate hike to influence the exchange rate, citing the example of South Korea’s weakening won, despite several rate hikes.

“If you were serious about stopping the weaker yen just with rate increases, you would need significant hikes and they would be very damaging to the economy,” he added.

His comments helped weaken the yen and a touch against the dollar. But economists were divided on whether he really could keep a lid on change.

The tension between the BoJ’s policy stance and market bets is likely to resume in earnest if global recession fears soften.

“While the BoJ gave no sign of moving toward tightening anytime soon, its new inflation forecasts are stronger than the market view,” said Nobuyasu Atago, chief economist at Ichiyoshi Securities Co and former head of the price statistics division at the BoJ.

“That’s somewhat confusing because the BoJ must know that by issuing those higher forecasts, speculation over policy change won’t go away,” he added.

The BoJ now sees inflation averaging 2.3% for the year ending in March. — Bloomberg