BOJ maintains easing stance, highlighting fed policy divergence

The Bank of Japan indicated increasing concern over the economy as it stuck with a dovish stance that contrasts with the rate hikes of the Federal Reserve and the Bank of England this week.

The BOJ left its interest rates and asset purchases unchanged, according to a statement Friday, as predicted by all economists surveyed by Bloomberg.

The central bank revised down its economic assessment just two months after it was upgraded, citing the impact of COVID-19. It also flagged the need to monitor developments in markets and commodity prices in the wake of Russia’s invasion of Ukraine.

Stocks pared gains a fraction when the market reopened after lunch, while the yen was largely unchanged against the dollar, an indication that the outcome was largely in line with expectations.

With the decision, the BOJ cemented its outlier status following the interest-rate hikes of its global peers this week.

Japan still has little price growth compared with the U.S. or Europe and its economy is lagging peers in returning to pre-pandemic levels, making its stand-pat decision relatively straightforward this time.

Still the position for policymakers could get increasingly awkward over the coming months as public angst rises over cost-push inflation driven by rising fuel prices and a weakening yen.

“The BOJ is making it crystal clear that it won’t follow the Fed and other peers in tightening policy. With little wage growth, it can’t tighten so easily especially when uncertainties are intensifying due to the war in Ukraine,” said Izuru Kato, chief economist at Totan Research.

“They are also aware that the meaning of a rate hike in Japan is very different from in the U.S. and Europe because the government has a mountain of public debt. Raising rates here would be tantamount to opening Pandora’s box,” Kato said.

While inflation still remains subdued in Japan, it is picking up speed. Key consumer prices rose 0.6% last month, according to a government report earlier Friday, as energy costs climbed at the fastest pace in 41 years.

Price growth is expected to accelerate more notably from April, when the heavy drag from cell phone fee cuts begins to drop out of calculations.

With a further boost from energy prices also expected, an increasing number of economists are warning inflation could reach 2% or breach it this year. That might put consumers off spending and deepen public discontent at a time of limited wage growth, while also raising questions about the BOJ’s continued stimulus to generate inflation.

The BOJ acknowledged the strengthening price trend by tweaking its wording on the outlook for inflation, saying it’s expected to “clearly” rise and citing energy prices as a key driver.

While developments in the war are likely to keep markets volatile, it’s far from clear how long the situation will last and whether it will feed a longer-term trend, said economist Harumi Taguchi at S&P Global Market Intelligence.

“The BOJ is focused fundamentally on whether a broad range of products see price hikes as a result of companies passing on costs, and whether wages start rising,” she said. “For the BOJ, their stance is still ‘wait and see’ and that’s why they’re sticking to their position that it’s too early to change policy.”

“Our focus will be on the BOJ’s assessment and any guidance it gives on how it may respond to the risks,” said Yuki Masujima, economist at Bloomberg Economics. “In our view, the timing of its policy normalization has shifted further into the future, to 2024.”

The central bank’s concern over the economy comes with a majority of private economists expecting another contraction this quarter, mainly due to fallout from the omicron variant that struck earlier in the year.

A weaker economy could complicate Prime Minister Fumio Kishida’s campaign for key elections this summer. On top of the measures he has taken to cap gasoline prices for consumers, the premier is likely to order a large-scale economic package, according to a local media report Wednesday.

Gov. Haruhiko Kuroda is likely to stress the need to keep ultraloose policy in place to support the economy during his news conference in the afternoon. In doing so, he will need to tread a delicate path as too strong a tilt toward easing could weaken the yen further and add to concerns over import costs.

The fall in the yen, driven by the divergence in central bank policy, is exacerbating the impact of rising commodity prices and to the pain for businesses and households.

It’s critical for the BOJ to align with Kishida’s government, particularly this year as he is likely to select a successor to Kuroda, whose term ends in April next year.

“The BOJ can’t tighten policy because unlike the U.S. and Europe, domestic demand isn’t driving inflation at all,” said Nobuyasu Atago at Ichiyoshi Securities Co., adding that further easing to help the economy would soften the yen further. “The BOJ can’t move in any direction.”