FX.co ★ BoJ Keeps Key Interest Rate Near Zero

The Bank of Japan has decided to maintain its central interest rate near zero. This, combined with the bank's latest predictions of stable inflation around 2 percent, has reduced the likelihood of future aggressive tightening. The decision was unanimous by the policy board led by the Governor, Kazuo Ueda, to let the overnight interest rate hover between 0 and 0.1 percent.

The board also confirmed that its bond purchasing program will remain unchanged as per the March meeting's decision. In March, the Bank of Japan had increased its interest rates for the first time in 17 years, becoming the last central bank globally to end negative rates, a result of strengthening inflation indications.

Additionally, the central bank decided to terminate its yield curve control policy, which had limited the interest rate on 10-year Japanese government bonds at approximately zero. Friday's report on Economic Activity and Prices, released together with the policy announcement, predicted inflation to rise until fiscal 2025. This prediction is primarily due to increasing crude oil prices and the diminishing impact of the government's economic initiatives.

The bank revised its inflation outlook for fiscal 2024 up to 2.8 percent from 2.4 percent. Concurrently, the predicted inflation rate for fiscal 2025, excluding food, was raised to 1.9 percent from 1.8 percent. Inflation for fiscal 2026 is expected to be 1.9 percent.

However, the forecasts indicated that the core inflation rate, excluding fresh food and energy, would remain around 2 percent during the forecast period. The bank stated that price risks were primarily on the high side for fiscal 2024, but should balance out thereafter.

Meanwhile, the bank has adjusted downwards its growth prediction for the fiscal 2024, from 1.2 percent to 0.8 percent, due to decreased private consumption. The Japanese economy is predicted to grow by 1.0 percent in both fiscal years 2025 and 2026. Marcel Thieliant, an economist at Capital Economics, said the Bank of Japan showed a growing confidence in reaching its inflation target and is likely to raise its policy rate further, possibly to 0.3 percent, in July.

"...the Bank isn't finished raising interest rates yet, although we think a further slowdown in fundamental inflation will prevent more than one rate hike," Thieliant stated. Following the Bank of Japan's decision, the market has viewed the latest statement as overwhelmingly dovish - primarily owing to the absence of any mention of policymakers' worries about the recent weakening of the Japanese yen, which has since sunk to a 34-year low against the US dollar, increasing chances of market intervention by authorities.