By Noriyuki Suzuki,
Bank of Japan Governor Kazuo Ueda said Friday after the central bank left its monetary easing policy in place that it is still premature to envision a change, be it ending negative interest rates or its yield cap program.
Despite market expectations that the BOJ could pare back monetary stimulus sooner rather than later, it did not signal a shift in its dovish stance, maintaining that stable inflation is not in sight.
Sustained wage growth is one of the critical factors in determining whether the time is ripe for a policy change, Ueda said at a press conference at a time when rising prices are squeezing household budgets due to falling real wages.
The BOJ retained its existing policy framework at the end of a two-day meeting. Under its yield curve program, short-term interest rates are set at minus 0.1 percent and 10-year Japanese government bond yields are guided around zero percent.
The unanimous decision came as the nine board members examined the effects on financial markets and the broader economy of a decision at their previous meeting in July to allow 10-year bond yields to rise toward 1.0 percent.
"If we can foresee the inflation target being achieved, then we will consider a policy change. At this point, uncertainty over the economy and prices is extremely high and we are nowhere near deciding on the timing of a policy change or what steps to be taken," Ueda said at the press conference after the meeting.
"We will patiently continue with monetary easing to achieve the inflation target sustainably and stably, while responding flexibly to a changing environment," he added.
Ueda was careful not to drop hints of an early shift to policy tightening, renewing a pledge to take easing steps without hesitation if such a need arises. He sees the risk of inflation undershooting the BOJ's target as far greater than that of overshooting.
The meeting was the first since his comments in a Japanese newspaper interview were perceived as hinting at an end to negative interest rates if prices and wages rise. He also said the central bank would have sufficient information and data to help it make a decision by year-end.
Friday's decision to maintain policy means the BOJ will remain far behind the U.S. Federal Reserve and the European Central Bank in hiking rates.
While the BOJ said inflation expectations are rising, it is yet to be convinced about the prospect of stable inflation accompanied by sustainable wage growth. The headline inflation rate, however, remained above its 2 percent target in the 17 months through August, reflecting higher import costs.
Ahead of the policy meeting, financial markets began to price in a post-monetary easing future. The benchmark 10-year Japanese government bond yield ended Friday at 0.740 percent, after hitting a 10-year high of 0.745 percent the day before.
The yen is not far from the psychologically important 150 line to the U.S. dollar, testing the tolerance of Japanese authorities wary of its rapid depreciation. The currency's depreciation is a byproduct of the BOJ's dovish tilt.
"It is necessary to pay due attention to developments in financial and foreign exchange markets and their impact on Japan's economic activity and prices," the BOJ said.
The BOJ decided to continue to buy 10-year bonds at a fixed rate of 1.0 percent, the maximum limit allowed under the yield cap program, every business day in principle.
Asked about the rising trend of long-term yields, Ueda said it coincides with heightening inflation expectations, adding, "There is not much to worry about."
The BOJ will continue with its buying of assets, including exchange-traded funds with an annual limit of 12 trillion yen, amid "extremely high" economic uncertainties as the global wave of monetary tightening threatens to slow growth.
After years of deflation, Japan has seen some positive developments toward stable inflation, with the best wage rises in three decades coming out of talks between labor unions and management this year.
The output gap, a key gauge of supply and demand used to assess inflation trends, turned positive for the first time in four years in April-June, according to Cabinet Office data.
Beside the lack of confidence in the inflation outlook, the BOJ board members may not want to rock the boat at a "sensitive" time when it is looking possible that Prime Minister Fumio Kishida might dissolve the lower house for a snap election this year, said Shunsuke Kobayashi, chief economist at Mizuho Securities.
"That being the case, the BOJ is preparing for upside risks to inflation and mindful of the yen's weakness. If the yen's fall continues to push up inflation forecasts, the BOJ will have to move toward removing monetary stimulus," Kobayashi said.
A weak yen cuts both ways for Japan's economy. But the recent precipitous fall of the yen, whose real effective exchange rate is already at a historic low against its counterparts, has added to the pain for households by accelerating inflation of imported products and exposing the vulnerability of a country poor in resources.
Kishida has unveiled plans to compile economic and inflation-relief measures in October as consumers feel the pinch of rising prices of everyday goods at a time when real wages continue to fall.
Ueda acknowledged that inflation is becoming a burden, saying that he is "extremely concerned" about real wages not rising. As inflation has not been easing as much as previously expected, the BOJ will examine new data when it releases a fresh outlook report in October.
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