By Noriyuki Suzuki,
The Bank of Japan on Tuesday left its monetary easing framework unchanged and vowed to keep ultralow rates to ensure wage growth and stable inflation, capping off 2023 with a dovish tilt as its chief Kazuo Ueda trod carefully not to fuel market talk of policy normalization.
The BOJ governor said the likelihood of attaining the central bank's 2 percent inflation target stably is "gradually increasing," but he needs more time and economic data to become convinced about the outlook.
At the end of a two-day meeting, the Policy Board decided that short-term interest rates will remain at minus 0.1 percent while it will continue guiding 10-year Japanese government bond yields to around zero percent.
The BOJ stuck to its stance that the previously rigid 1.0 percent ceiling is now a "reference" point, a decision made in October to allow long-term yields to rise further and better reflect the economic situation.
The yen dropped versus the U.S. dollar after the BOJ retained its dovish policy guidance, including a pledge to persist with monetary easing and take additional easing steps if needed. It will continue to buy government bonds, exchange-traded funds and commercial paper to support the economy.
Ueda clarified that he spoke of the tasks ahead in general, not specifically monetary policy maneuvering, when he said in early December that a "more challenging" time was expected into next year. His comments had boosted expectations that the BOJ would end negative interest rates or its yield cap program sooner than initially thought.
"We need to examine whether a cycle of wage and price hikes is in place," Ueda said at a post-meeting press conference. "It's going to be judged by looking at things comprehensively, not just specific data or events."
The sustainability of high-paced wage growth is seen as the missing link in achieving stable inflation as envisaged by the BOJ, at a time when consumers are already feeling the pinch of rising prices of everyday goods and headline inflation has remained consistently above 2 percent for well over a year.
Ueda acknowledged that the inflation rate has been coming down at a slower pace than previously expected, despite the BOJ's view that cost-push factors would only be temporary. Such entrenched inflation is part of the reason why consumers whose wages have risen cannot sense any improvement.
The BOJ's policy statement said the rise in the core consumer price index will likely remain above 2 percent for fiscal 2024 through March 2025, adding that underlying inflation will rise gradually toward its target, helped by wage growth.
Asked if inflation-adjusted wage growth staying in negative territory can be an impediment for the BOJ to end the negative rate policy, Ueda rejected such a view.
"It won't necessarily prevent policy normalization if we can expect real wage growth to turn positive in line with easing consumer price inflation," he said.
The global tide of monetary tightening has been changing, allowing the yen to recover to some extent from its heavy sell-offs seen earlier as the BOJ's dovish stance stood out among its peers.
The Federal Reserve, at its recent policy meeting, paused its rate hikes and is now expected to start cutting them in 2024. The same is true for the European Central Bank and the Bank of England.
The BOJ's decision in the final meeting of this year reduced the chances of ending the negative rate policy at its meeting in January, some analysts said, while financial markets expect it to be removed in 2024.
Choosing the right timing could be difficult next year, as the Fed's rate cuts will likely lead to a stronger yen, which would ease inflation by curbing import costs for resource-scarce Japan.
In a rare move, Japan's economy revitalization minister Yoshitaka Shindo attended part of the meeting on Tuesday, a day after the chief of the nation's most powerful business lobby Keidanren said the BOJ should normalize policy "as soon as possible."
"I don't think it's appropriate to make a policy change in a hurry just because the Fed is expected to move in three to six months' time," Ueda said.
Within the nine-member Policy Board, some have expressed growing confidence in the sustainability of high-paced wage growth, pointing to a change in price-setting behavior by firms. The BOJ has stressed the need for firms to shake off practices deeply rooted in the nation's years of experience with deflation.
Inflation has become a headache for Prime Minister Fumio Kishida, hit by a downward spiral in public support as a political funds scandal engulfing factions within the ruling party deepens.
For its part, the government has implemented a spate of inflation relief measures to ease the pain of the ongoing cost-of-living crisis. But it also warns of the risk that Japan may slip back into deflation, and Kishida is calling for firms to continue raising wages ahead of annual negotiations with labor unions.
The BOJ "again pushed themselves into a corner if they really wanted to tighten policy," said Shoki Omori, chief Japan desk strategist at Mizuho Securities. "BOJ policy tightening has been pushed back."
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BOJ set to retain monetary easing with focus on end to negative rates
