By Noriyuki Suzuki,
The Bank of Japan on Friday maintained its powerful monetary easing amid tepid inflation and heightened uncertainty over the crisis in Ukraine, boosting the likelihood it will be the last among major central banks in transitioning toward policy normalization.
With a recent bout of inflation driven by surging commodity prices seen as temporary, the BOJ decided at its two-day policy meeting to set short-term interest rates at minus 0.1 percent and guide long-term interest rates to around zero to achieve its still elusive 2 percent inflation target.
BOJ Governor Haruhiko Kuroda said inflation driven by higher commodity prices since Russia's invasion of Ukraine is "unfavorable" for Japan. Even if the nation sees inflation accelerating toward the BOJ's 2 percent target, as early as in April, this will not necessitate a change to its powerful monetary easing, he said.
Kuroda stuck to his view that a weak yen is positive for the Japanese economy, as market expectations have grown that the currency will depreciate further to reflect the divergent policy stances of the BOJ and the more hawkish U.S. Federal Reserve or the European Central Bank.
"It will be neither necessary nor appropriate to tighten policy because much of the expected inflation will result from higher commodity prices and import costs," Kuroda told a press conference after the policy meeting.
The BOJ's decision, though widely expected, indicates it does not share the same urgency as its U.S. and European counterparts that are raising interest rates to tame inflation, even as the conflict in Ukraine threatens to cut economic growth.
"The BOJ will be the last to normalize policy while other central banks are raising interest rates. But this would be the best opportunity for the BOJ, and the last for Governor Kuroda during his term, to attain the 2 percent inflation target," said Yuichi Kodama, chief economist at Meiji Yasuda Life Insurance Co.
The Fed on Wednesday implemented its first interest rate hike since 2018, with six more expected this year. The Bank of England on Thursday raised interest rates for its third straight meeting, while the ECB is winding down asset purchases and is expected to raise rates in 2022.
Japan's economy has "picked up as a trend, although some weakness has been seen in part" due to the impact of COVID-19, the BOJ said, offering a less optimistic view as a recovery in consumption stalled. However, the core consumer price index excluding volatile fresh food items is expected to rise "clearly," the bank said.
Financial markets have been volatile since the Russian invasion of Ukraine and "future developments warrant attention," the BOJ said, acknowledging "extremely high" uncertainty over the economic impact of the unfolding crisis.
Anti-coronavirus curbs that have been in place in parts of Japan hit by rising COVID-19 cases are set to end Monday, allowing a gradual return to normal social and economic activities.
Kuroda brushed off concerns about stagflation, or economic stagnation and inflation taking place at the same time, in Japan, the United States or Europe.
The yen had weakened to a six-year low against the U.S. dollar as currency markets priced in the prospect of bigger interest rate differentials.
A weak yen cuts both ways as it boosts Japanese exporters' overseas profits when repatriated but also inflates import costs.
It means greater costs for import-reliant businesses and potentially higher goods prices for consumers.
Kuroda played down the magnitude of the yen's fall on the economy, saying its impact on inflation has been "extremely small."
"Policy normalization in the United States or Europe based on their inflation situation is natural and important to sustain growth. That doesn't mean we need to follow them and raise ours," the BOJ chief said.
"Larger interest rate differentials will not weaken the yen immediately," he said.
The yen fell to as low as 119.00 to the dollar in Tokyo after the BOJ's decision.
Kodama said the yen's weakness is unlikely to become a headache for the BOJ for now as the current inflation is commodity-driven.
"It's possible that consumers won't see it that way and think the weaker yen is driving inflation, and that political pressure will grow (on the bank to address it)," he said.
Japan's core CPI in February gained 0.6 percent from a year earlier at the fastest pace in two years, with the rise limited by lower mobile phone fees. Economists believe the key inflation gauge could exceed the BOJ's 2 percent target in the coming months as the year-on-year mobile fee impact will be factored out.
As part of its monetary easing, the BOJ will continue to buy exchange-traded funds with an annual upper limit set at 12 trillion yen ($101 billion).
The BOJ is expected to release its revised economic and price outlooks in April.
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