Bank of Japan Keeps Ultra-Loose Policy, Cuts Core Inflation Forecast

The Bank of Japan (BOJ) has maintained its ultra-loose monetary policy at its initial meeting of the year while revising down its core inflation projection for the upcoming fiscal year.

In a statement released on Tuesday following a two-day meeting, the BOJ unanimously decided to keep interest rates at -0.1 per cent and adhere to its yield curve control policy, which sets the upper limit for 10-year Japanese government bond yields at 1 per cent . Yields on 10-year Japanese Government Bonds (JGBs) experienced a slight decline, and the Japanese yen strengthened by 0.1 per cent against the US dollar. The Nikkei 225 stock index briefly reached a new 33-year high before retracing some gains.

All economists surveyed by a news agency anticipated the BOJ to maintain its negative rate policy this month, distinguishing it as the sole central bank globally with negative rates. Governor Kazuo Ueda is scheduled to elaborate on this decision in a subsequent press conference.

Market expectations are leaning towards the BOJ potentially abandoning its negative rates policy in April, contingent on meaningful wage increases confirmed during the annual spring wage negotiations. The BOJ believes that such wage growth would stimulate consumer spending and contribute to a more sustainable and steady inflation driven by domestic demand.

In the quarterly outlook on the Japanese economy, BOJ board members lowered their median growth forecast for core consumer prices (excluding food prices) to 2.4 per cent for fiscal 2024 starting in April, compared to the 2.8 per cent estimate from October. The central bank marginally increased the core Consumer Price Index (CPI) inflation projection for fiscal 2025 to 1.8 per cent, up from the previous 1.7 per cent. The BOJ maintained its previous median forecasts for "core core inflation," which excludes food and energy prices.

Japan's core CPI decelerated to 2.3 per cent in December, alleviating pressure on the BOJ to normalise its policy, although this figure has remained above the BOJ's stated 2 per cent target for 21 consecutive months.