The Japanese yen weakened but Tokyo stocks gained as the Bank of Japan wrapped up its first interest rate meeting under a new leader. While keeping its ultralow rates unchanged, the central bank announced a review of existing monetary policy, paving the path for future adaptation.
Under new Governor Kazuo Ueda, the BOJ left short-term rates in negative territory. It also did not tweak its "yield curve control" policy of ensuring that Japanese government bonds trade within a certain yield band.
Given the "extremely high uncertainties" for financial markets and the economy at home and abroad, the BOJ said it will "patiently" continue with monetary easing while responding "nimbly" to fresh developments. It continues to hold a goal of sustaining 2% inflation, something that it said must combine with increases in Japanese wages.
In response, the yen jumped from just above ¥133 to the U.S. dollar on Thursday as the two-day policy board meeting began to close near ¥136 on Friday as the meeting came to an end. The central bank also released an updated forecast for the economy for the next three years.
Japan is heading into a "virtuous cycle" as higher incomes lead to higher spending, according to the bank's report. The economy will likely recover "moderately" in the middle of this fiscal year, which runs through next March, aided by spending produced by pent-up demand after the pandemic.
But Japan also faces headwinds from higher commodity prices and a slowdown in recovery overseas, the bank says. The forecast predicts GDP growth of 1.4% in Japan for fiscal 2023, a figure trimmed from the 1.7% projection it gave in January, with inflation slowing from 3.0% in 2022 to 1.8% for fiscal 2023. Growth may then slow to 1.2% for fiscal 2024 and 1.0% for fiscal 2025, with inflation hitting the bank's 2.0% target in fiscal 2024.
Inflation crested to 4.2% in January, a 41-year high, but state subsidies since have helped offset the high cost of utility bills in a country that imports all its oil. The central bank anticipates the pace of price increases will continue to come down in the middle of this fiscal year given the waning impact of price pass-throughs due to higher import costs.
On the positive side, the ability to raise prices for goods -- something that was a no-go area for Japanese companies for the better part of 25 years of deflation -- as well as tight labor markets are finally producing wage gains in Japan. An improving economy, higher consumption, higher prices, higher wages -- that's the virtuous cycle that central bank is desperate to see as the country's steady course.
Commodity prices also appear to have peaked abroad. This gives the bank confidence that inflation will continue to temper. It would accelerate again "moderately," the BOJ says, if those wage gains do indeed set in. With increasing numbers of women and seniors already in the work force, the BOJ expects labor markets to tighten.
The BOJ statement on monetary policy said the board unanimously voted to keep short-term interest rates at -0.1% while buying and selling Japanese government bonds as necessary to keep the longer-term 10-year JGB yield around 0.0%.
In keeping its yield curve control in place, the central bank stated that it will allow the 10-year JGB yield to fluctuate plus or minus 0.5 percentage points from that 0.0% target.
The BOJ also said it would continue its asset purchase plan for the shares of exchange-traded funds and J-REITs.
Change isn't imminent
The newly announced review of monetary policy will take 12 to 18 months to complete as it looks at the policies of the last 25 years. Under Ueda, the central bank has scrapped its policy of giving guidance for future interest rates. Ueda, an economist and academic, takes over as governor from Haruhiko Kuroda, the Shinzo Abe-era appointee who has retired after a decade in charge.
Some economists were expecting Ueda to shift the central bank's policy later this year, perhaps as soon as the meetings in June or July. But the long timeframe for the review suggests any change will be slow in coming. In that respect, Ueda is a calm pair of hands and contrasts with the instant policy change from Kuroda in attempting to implement "Abenomics."
Banks and traders are desperate to see an end to yield curve control. It has deadened the market for Japanese government bonds while low interest rates hurt bank profitability. Bank stocks sank in response to the lack of change at this meeting. The largest, Mitsubishi UFJ Financial Group (T:83096 and (MUFG) ), ended the Asian trading day down 0.8%. Rival Mizuho Financial Group (T:8411 and (MFG) ) finished down 1.0%.
However, Japanese stocks in general followed Wall Street higher, with the broad-market Topix ending Friday up 1.2%. Tokyo stocks have gained 10.1% so far this year, running ahead of the S&P 500's 8.1% advance.
While interest rates remain very low in Japan and China, Asia continues to be concerned with the pace of rate increases and inflation in the West. Fed fund futures are pricing in a 90% likelihood of a 25-basis-point increase in U.S. rates next week but only a 25% chance of a similar hike in June. And they are anticipating 60 basis points in rate cuts by the end of 2023, with the U.S. economy looking leggy.
The BOJ notes that external factors such as European and U.S. interest rates and inflation can have a strong effect on export-driven Japan. It is also watching the pace of recovery in China, which saw manufacturing recover quickly when anti-Covid measures ended but has been slow to see any sustained increase in consumer spending and services.