The Bank of Japan maintained the benchmark rate of interest at 0.25 percent on Thursday. It cited uncertainty in Japan’s economy and price dynamics.
This comes after the Nikkei index fell 0.85% and the yen dropped 0.3% to its lowest level in a month.
BOJ’s prudent stance highlights its delicate balance between inflation pressures, and a waning economy.
BOJ Surprises Markets by Holding Rates
Economists polled for Reuters had largely predicted a rate increase of 25 basis points, but the Central Bank chose stability as a sign that it was still concerned about the broader economy.
Naoki Tamura, a board member who urged for an increase in rates, was the only board member to vote against it.
The BOJ stated that there are still “high uncertainty” surrounding Japan’s economy and its prices.
The report also highlighted how exchange rate fluctuations are increasingly affecting pricing, especially as companies raise their wages and prices.
This decision is in stark contrast to the US Federal Reserve’s recent 25 basis point rate cut, which brought rates down from 4.25%-4.5%.
The BOJ is believed to be cautious because of its desire to balance monetary policy and government concerns about Japan’s weak GDP growth. This will turn negative by 2024.
Data on economic resilience suggests that the economy is resilient
Recent data, despite the BOJ’s conservatism, paints an optimistic view of Japan’s economic resilience.
In October, headline inflation was 2.3%. This is the 30th month in a row that the target of the Central Bank’s policy rate has been exceeded.
The November inflation figures, which are due on Friday, provide additional insight into inflationary trends in the country.
The business sentiment is also improving.
According to the latest BOJ tankan survey, the index of large manufacturing companies rose from 12 in December last year to 14, exceeding expectations and improving on 13 the quarter before.
The business-sensation metric shows that the optimism of Japan’s largest corporations currently exceeds their pessimism.
A note from Bank of America analysts on December 13 suggests that the Tankan Survey indicates Japan’s economic health remains stable.
The BOJ noted that the inflation rate and the economic growth are in line with its baseline scenario. This could lead to future changes in interest rates.
Analysts warn that the need for an immediate rate increase is not urgent.
The pressure of imported inflation has eased, while the expectations for inflation in medium term by companies appear to be stable.
The GDP of Japan has been declining year on year in both the first and second quarters 2024. Only a 0.5% increase was recorded in the third.
The BOJ has taken steps to prevent further economic disturbances, as the real GDP is expected to fall into negative territory in 2019.
The market will be watching inflation data, and the upcoming policy meeting to see how Japan manages to navigate its economic challenges in light of global monetary tightening.
Next steps for the BOJ will depend on economic data coming in and developments globally, especially as Japan’s inflation continues to be influenced by exchange rate volatility. The central bank seems to be taking a data-driven, cautious approach for the time being.
As new information becomes available, the post Bank of Japan keeps rates unchanged amid inflation pressures and JPY hits a one-month low could be updated.
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