BOJ sticks with current policy but changes view on inflation risks

The Bank of Japan has stood pat on policy but adjusted its view on inflation risks for the first time since 2014, a move that suggests the economy is not entirely immune to the price forces prompting other major central banks to pull back pandemic stimulus.

The BOJ kept its negative interest rate, bond yield target and asset purchases unchanged at the end of its policy board meeting Tuesday, a widely forecast decision given an overall inflation pulse that remains far weaker than in the U.S. and other major economies.

Still, with energy costs surging, the bank nudged up its forecasts for prices in the fiscal year starting in April and the following year, and changed its view on the inflation risks they face.

The adjustment, also widely expected, signals that the bank now sees the possibility of inflation outstripping their projections, not just undershooting them.

The moves show that the global wave of inflation prompting action from the Federal Reserve and the Bank of England has also reached Japan’s shores, albeit with less impact so far.

Instead of a surge in prices across the board, inflation in Japan remains limited to specific items such as fuel and cooking essentials, as companies continue to absorb the fastest rising costs in decades rather than risk losing business with higher price tags.

That means the extraordinary stimulus the BOJ has been pumping into the economy since well before the pandemic is likely to continue for now.

The yen weakened against the dollar to briefly reach ¥114.83 from ¥114.53 immediately before the decision. The move suggests investors viewed the overall outcome as indicating BOJ policy will continue on a path of divergence from the Fed.

“The BOJ will stick to its current policy framework at least until Kuroda’s term ends,” said Yuichi Kodama, chief economist at Meiji Yasuda Research Institute.

“Minor adjustments have made the framework sustainable, and I think the hurdle is very high for interest rate changes. That’s going to be the job for Kuroda’s successor,” he added.

In its quarterly outlook report, the BOJ raised its projections for the next two fiscal years, but still didn’t see inflation near its 2% target anytime in a projection period that ends in early 2024.

For the 12 months starting in April, the bank said it now sees inflation of 1.1%, up from the 0.9% it projected three months ago. In the year after that, it sees inflation staying around 1.1%.

Still, the bank’s changed stance on inflation risks indicates it is more open to the possibility that prices could rise at a faster-than-expected pace, an outcome that has been repeatedly seen elsewhere in the world.

The BOJ’s decision comes amid a sharp surge in omicron cases that poses a new risk to Japan’s economy, at least in the short term.

While case counts and fatalities are still low compared with the U.S. and elsewhere, Prime Minister Fumio Kishida’s government is reportedly planning to place Tokyo and neighboring prefectures under a quasi-state of emergency to impose stricter COVID-19 measures.

Reflecting a delay in Japan’s recovery, the BOJ cut its growth forecast for the current fiscal year ending March, while raising next year’s projection to 3.8% from 2.9% projected in October.

“A pickup in Japan’s economy has become evident as the impact of COVID-19 at home and abroad has waned gradually,” the BOJ said in the outlook report, a change from its previous assessment that the economy was in a “severe” state due to the pandemic, though it had picked up as a trend.