In a largely anticipated move, the Bank of Japan kept ultra-loose monetary policy on Tuesday, highlighting policymakers’ need to wait for additional information on whether wage growth will be sufficient to sustain inflation at its target rate of 2%.

Additionally, the central bank did not alter its dovish policy advice, which dashed traders’ hopes that it would adjust the wording to indicate that negative interest rates would soon come to an end.

Although wages and prices seemed to be heading in the right direction, BOJ Governor Kazuo Ueda stated that things were still unclear.

“The chance of trend inflation accelerating towards our price target is gradually heightening,” Ueda said in a press conference after the meeting. “But we still need to scrutinise whether a positive wage-inflation cycle will fall in place.”

The BOJ maintained its short-term rate objective at -0.1% and its 10-year government bond yield target at about 0% during the two days of talks that concluded on Tuesday. Additionally, it did not alter the 1.0% loose upper band that was specified for the 10-year yield.

The BOJ reiterated its pledge to take “additional easing steps if necessary” in the statement that accompanied its decision, and it added that there was “extremely high” uncertainty surrounding the economy.

The BOJ’s decision to postpone reducing stimulus caused the yen to decline significantly and Japanese stock futures to rise.

There is a greater likelihood of a policy change in the near future because Japan has seen inflation stay above 2% for more than a year and some businesses have indicated they are willing to continue rising salaries.

By increasing the cap on the yield on the 10-year bond, the BOJ loosened its control over long-term borrowing costs in July. In October, the cap was reduced to a passing allusion, indicating that Ueda was gradually tearing down the extreme stimulus of his predecessor.

In November, Reuters questioned more than 80% of analysts, and half of them predicted that the BOJ would stop its negative rate policy in April of next year. Some believe that a policy change is possible in January.

When the BOJ produces a quarterly outlook report with updated growth and pricing estimates in January and April, analysts speculate that it may be easier to move during those months.

The European and American central banks have signalled that they are done raising interest rates, which could complicate the BOJ’s decision given the drastically shifting global monetary policy landscape.

According to some analysts, raising rates at a time when other central banks are lowering them might cause the yen to rise, hurting large manufacturers’ profits and discouraging them from raising salaries.

(Adapted from PublicDebtNet.org) 

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