Source-The-Globe-and-Mail
The Bank of Japan (BOJ) affirmed its decision to maintain interest rates near zero on Friday, indicating a growing certainty that inflation could sustainably reach the desired 2% mark in the coming years. However, the absence of a clear roadmap for future rate hikes triggered a widespread decline in the yen. The currency plummeted to a fresh 34-year low, dipping below 156 yen to the dollar, fueling apprehensions in the market regarding potential currency intervention measures.
Commenting on the situation, Rodrigo Catril, senior FX strategist at National Australia Bank, expressed disappointment over the lack of guidance from the central bank. Catril highlighted concerns that the Bank of Japan’s loose monetary policy might be contributing to the yen’s weakness, suggesting that a shift in policy might be necessary to bolster the currency.
Inflation Outlook and Projections
As anticipated, the Bank of Japan maintained its short-term interest rate target between 0-0.1%, which was established just a month earlier during its significant departure from its extensive stimulus program. Reflecting its growing confidence in achieving its inflation target, the BOJ’s quarterly outlook report indicated a gradual increase in trend inflation, driven by synchronized growth in wages and prices.
The report projected core consumer inflation to reach 2.8% in the current fiscal year, before moderating to 1.9% in fiscal 2025 and 2026. Similarly, the “core core” index, excluding fuel costs, was expected to rise to 1.9% in the next two fiscal years before accelerating to 2.1% in 2026. Despite these projections, concerns lingered regarding the sustainability of the “virtuous circle,” particularly in maintaining positive real wages amidst higher-than-expected inflation.
What does the yen at a 34-year low mean for Japanese companies? Bank of Japan Signals Confidence in Inflation
Market Expectations and Policy Implications
Market attention turned to Governor Kazuo Ueda’s post-meeting press conference for insights into the Bank of Japan’s stance on future rate hikes and the fate of its bond-buying program. The removal of references to maintaining bond purchases at a specific pace in the BOJ’s statement fueled speculations about potential changes in its policy approach.
Despite recent threats of intervention, the yen’s downward trajectory persisted, posing challenges for policymakers amidst worries about the impact on consumer spending due to rising living costs. While some traders doubt Tokyo’s ability to reverse the yen’s slide, Ueda emphasized the possibility of further rate hikes contingent upon broad-based wage gains and subsequent increases in service prices.
However, uncertainties regarding the inflation outlook persisted, exacerbated by data indicating a slowdown in Tokyo core inflation below the BOJ’s 2% target in April. Economists remain divided on the timing of the Bank of Japan’s next move, with projections ranging from the third quarter to later in the year. Amidst these uncertainties, market participants await clarity from the BOJ on its policy direction and its strategy to navigate the evolving economic landscape.
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