Ueda Holds Stimulus as BOJ Side Steps Tightening Wave for Now

(Bloomberg) — Bank of Japan Governor Kazuo Ueda continued to defy global central bank trends by sticking with stimulus as he waits for signs of more sustainable inflation while his peers signal the need to raise interest rates further to rein in prices.

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Ueda and his fellow board members left their negative rate and yield curve control program unchanged at the end of a two-day gathering and maintained their view that inflation will slow over the coming months, according to a statement Friday.

The yen fell after the widely expected outcome though pared some losses after the governor didn’t clearly rule out the possibility of changes to come in July at his press conference. The currency had hit a seven-month low of 141.50 on Thursday. Japan’s benchmark government yield retreated.

The decision underlines the BOJ’s outlier status among global central banks including the Federal Reserve and the European Central Bank. A renewed focus on rate differentials during a busy week of policy decisions helped send the yen lower against the dollar and to a 15-year nadir against the euro Thursday.

“The decision should not have been a surprise to anyone other than die-hard hawks,” said John Vail, chief global strategist at Nikko Asset Management. “Anyone who shorts the yen versus the dollar must realize that the authorities will likely intervene with little warning if it gets much weaker.”

Last autumn Japan spent around $65 billion stepping into currency markets to prop up the yen when it approached the 146 and 152 levels against the dollar. Officials have already issued warnings over rapid moves in the currency but levels and movement still look some distance from triggering a response.

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While the Fed skipped a rate hike earlier this week, the ECB raised its main rate again and both hinted at the likelihood of more hikes to come as they continue to battle against inflation. That signaling could keep pressure on the yen.

By contrast, Ueda is sticking to his view that the cost of prematurely tightening policy could do more to damage Japan’s nascent inflation trend after years of work to get prices rising as part of a growth strategy. The BOJ’s dogged defense of its stimulus and in particular its cap on government debt yields have served as an anchor for global yields.

While the consensus is that monetary easing is here to stay for a while yet, speculation rumbles on that the BOJ may choose its next meeting in July to tweak its control of yields, a move that could spark renewed turbulence in global markets as seen after an adjustment in December.

“Ueda wants to be logical and that likely means he wants to make a policy change when the BOJ revises up its inflation or economic outlook,” said Masamichi Adachi, chief Japan economist at UBS Securities and a former BOJ official. Adachi holds the view that the BOJ will do something in July, along with about a third of economists polled earlier in June.

“The BOJ can’t really say they are going to adjust the YCC ahead of time, so every BOJ meeting is live now just like the Fed’s,” Adachi added.

When asked about speculation of policy adjustments in July, Ueda avoided slamming shut the door to that possibility.

“In between one policy meeting and another, various new data come in. Based on that information, the latest policy meeting may have a different result to the one before,” Ueda said. “It’s inevitable that sometimes there’s a certain element of surprise.”

What Bloomberg Economics Says…

“Looking ahead, we expect the BOJ to remain on hold at its July meeting, sticking to its view that the economy probably isn’t strong enough to withdraw stimulus, and carefully avoid sending any signals that might be taken to indicate it is tilting toward tightening.”

— Taro Kimura, economist

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Many economists are flagging that the central bank’s inflation forecast for this fiscal year is too low and needs bumping up when the BOJ releases its quarterly projections in July. That could provide a reason for policy tweaks then, some of them argue.

Goldman Sachs this week raised its price outlook to 2.8% for this fiscal year, widening a gap with the BOJ’s 1.8% estimate. Unaffected by government utility measures, a deeper inflation indicator that excludes energy costs has continued to accelerate to the highest level since 1981.

“Ueda’s comments show that inflation is putting him in a tough spot to decide on which way to go,” said Junki Iwahashi, senior economist at Sumitomo Mitsui Trust Bank. “While it’s still too early to draw a conclusion, Ueda kept the door open for YCC tweaks in July.”

–With assistance from David Finnerty, Marcus Wong, Erica Yokoyama, Yoshiaki Nohara and Keiko Ujikane.

(Adds comments from Ueda’s press briefing)

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