he Bank of Japan (BOJ) maintained its benchmark rate and issued higher inflation forecasts that leave scope for its next hike to come earlier than the expected timing of summer.
The BOJ left its policy rate unchanged Friday at 0.75%, according to a statement, as it takes in the impact of last month’s increase and awaits the outcome of a snap election that may affect the nation’s spending plans. The stand-pat decision was forecast by all surveyed economists and leaves borrowing costs at the highest level in three decades.
In its latest quarterly outlook, the bank revised up four out of six of its inflation projections and reiterated its intention to raise borrowing costs if its outlook materialises. Board member Hajime Takata voted for a back-to-back rate hike, an indication of his concerns over the strength of the inflation trend, while the rest of the nine-member board supported the stand-pat decision.
The dissenting vote and the higher price forecasts gave the stand-pat decision a hawkish feel and kept the yen in check amid fears of further slides in the feeble currency.
“Looking at the upward revision to inflation, I think the recent yen depreciation is having an effect and I see the rate hike path continuing,” said Harumi Taguchi, principal economist at S&P Global Market Intelligence.
The latest decision comes days after Prime Minister Sanae Takaichi roiled financial markets with her pledge to suspend a sales tax on food purchases as part of her campaign platform for the Feb 8 election.
The outlook indicates that Governor Kazuo Ueda’s board is on track for another rate hike after lifting the policy rate last month to the highest since 1995. The central bank will need to weigh the impact of its December move on prices and the economy, the inflationary effect of continued weakness in the yen and the result of the election as it considers the timing of its next move.
“By proposing a hike to 1% now, Takata raises the question of whether the currently expected pace of increases roughly once every six months needs to be accelerated,” said Chotaro Morita, chief strategist at All Nippon Asset Management.
The BOJ gave other signs of a more robust view, too. It softened its assessment of economic risks as they are now generally balanced. With the negative impact of US tariffs receding, the bank cut the wording that it needs to watch if the economic outlook will materialise “without any preconceptions”.
“The BOJ’s communication seems aimed at signalling potential for an April hike,” said Yujiro Goto, chief FX strategist at Nomura Securities. The multiple upgrades of price projections “reflect a firmer assessment of underlying inflation trends and wage growth”, he added.
The yen was trading around 158.56 per US dollar, around the same level as just before the BOJ announcement and indicating that investors remain unconvinced there is a strong intention to move earlier than the consensus of June or July. But at the very least the decision and forecasts didn’t trigger another slide in the currency.
The Japanese currency hit a fresh 18-month low of 159.45 earlier this month after the initial reports that Takaichi would call an election. A victory that solidifies her coalition majority in parliament might give her more scope to proceed with expansionary fiscal policy, a direction that may put further downward pressure on the yen while forcing up longer-term bond yields.
Parliament was dissolved around lunchtime on Friday, paving the way for the shortest election campaign on record as Takaichi tries to capitalise on her elevated support ratings.
Earlier this week Takaichi pledged to cut the 8% consumption tax on food and non-alcoholic beverages to zero for two years if she and her Liberal Democratic Party triumph in the national polls. That’s a ¥5 trillion (US$32 billion or RM126 billion) move aimed at relieving pressure on households struggling to deal with the impact of inflation, especially rising food prices.
While the BOJ is keen to cultivate stable inflation after decades of weak prices and deflation, the cost of living crunch has become a key frustration for voters.
A report earlier in the day showed inflation excluding fresh food slowing to 2.4% on the impact of some of the government’s past and present subsidy programmes. The report showed food prices rose 5.1% in December from a year earlier. It also showed that inflation has averaged above the BOJ’s 2% target in the last four calendar years.
Takaichi’s tax proposal came after the premier last month pushed through parliament a ¥17.7 trillion economic stimulus package that included provisions to lower costs for utilities and gasoline. In its latest quarterly outlook report, the BOJ upgraded price projections despite those measures, as the steps are expected to boost underlying inflation over the long term.
The bank now sees inflation that excludes fresh food and energy averaging 2.2% in the fiscal year starting in April, up from the previous 2% view.
Takaichi’s tax cut proposal also sparked an intense bond selloff on Tuesday that pushed yields on longer-term government debt to the highest levels in decades.
While senior government officials including Finance Minister Satsuki Katayama called for calm, the BOJ refrained from commenting or taking any action to help reassure investors. Yields have since fallen back toward earlier levels.
Still, any comments on yields that Ueda makes at his 3.30pm press briefing will be closely scrutinised.
“The BOJ has stated in the past that it may purchase government bonds in the wake of speculative activity,” Taguchi said. “Ueda may make statements aimed at calming the situation to some extent, or may simply reiterate previous comments. The latter approach carries the risk of triggering further speculative gains in yields.”
Source: theedgemalaysia