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The Bank of Japan has held off on raising its interest rates, sending the yen lower against the dollar as investors hunted for clues on the timing of its next major policy change.
The Japanese central bank’s decision at its final meeting of 2023 came after the US Federal Reserve surprised markets last week by signalling that it would cut interest rates next year. That prompted warnings from the European Central Bank and the Bank of England that it was too soon for them to let down their guard against high inflation. The BoJ, struggling to exit decades of deflation, is the only major central bank to maintain interest rates below zero.
The BoJ on Tuesday kept overnight interest rates at minus 0.1 per cent. It also made no change to its yield curve controls, after it revised the policy in October to allow yields on 10-year Japanese government bonds to rise above 1 per cent.
The central bank stuck to its dovish tone, saying in a statement that it would “continue to maintain the stability of financing, mainly of firms, and financial markets and will not hesitate to take additional easing measures if necessary”.
The yen fell 0.6 per cent to ¥143.6 against the dollar on Tuesday, shortly after the BoJ’s decision was announced.
An unwinding of the BoJ’s accommodative monetary policy could have major ramifications for international bond and currency markets, especially following the recent volatility in the yen. The Japanese currency is still down 9.5 per cent this year against the dollar but has pulled back from a historic low of about ¥151 over the past month on expectations of policy tightening.
“The move today [in the yen] is just a short-term reversal, this isn’t the start of a trend,” said Takashi Miwa, chief Japan economist at Nomura. Miwa said the Japanese currency would get a boost in the first half of next year when Nomura expects the BoJ to end its yield curve controls, “most likely in March or April”.
Most economists had predicted that the BoJ would not make policy changes this week and would wait until there was more evidence of a persistent trend of wage rises.
Japan’s core inflation has exceeded the BoJ’s 2 per cent target since April 2022, but much of the elevation in consumer prices has been due to the increased cost of imported goods.
In contrast to other global central banks, the BoJ faces the challenge of turning the current relatively mild inflation into a permanent end to deflation.
Earlier this month, BoJ governor Kazuo Ueda warned of an “even more challenging year” ahead for policy management, briefly raising expectations the BoJ would soon stop holding interest rates below zero, sending the yen sharply higher.
Ueda is scheduled to hold a news conference on Tuesday afternoon, which investors will be watching closely for any hints on his outlook on inflation or the timing of a policy change.
BNP Paribas and Deutsche Bank have projected the BoJ will lift its negative rate policy in January, while UBS and Goldman Sachs expect the revision to come later in 2024.
