Contrasting other major central banks which have already started normalizing their respective policies (with the latest one being the Bank of Canada) or are communicating readiness to do so, the Bank of Japan decided to keep its ultra-loose monetary policy in place as it completed today’s meeting. In addition, the Bank pushed forward the timing it anticipates to reach its annual inflation target. This is the sixth time it has done so.
As expected, the BoJ maintained the 0.1% interest it charges on a portion of excess reserves that financial institutions maintain with the central bank. Furthermore, it made no changes to the yield target of around zero percent for 10-year Japanese government bonds.
The Bank’s decision to yet again postpone the timing it expects to meet its 2% inflation target might had taken markets by surprise. Under its current projections, the target will be met sometime in 2019, a year later than previously thought. The Bank has in the past been criticized regarding the effectiveness of its stimulus program and today’s developments will surely reignite the debate surrounding this issue. In the press conference that followed, BoJ Governor Haruhiko Kuroda stated that he doesn’t “think people will lose trust in the BoJ just because our forecasts were missed.”
Moreover, the BoJ cut its inflation estimates for the current year and the year after while it raised its growth forecasts for the same period. Specifically, core inflation is projected to stand at 1.1% and 1.5% in 2017 and 2018 respectively, down from 1.4% and 1.7% before. GDP growth is anticipated at 1.8% and 1.7% during 2017 and 2018, up from 1.6% and 1.3%. The Bank also noted that the risks to growth and inflation are skewed to the downside.
In terms of reaction in the forex markets, the Japanese currency weakened relative to majors including the dollar and the euro as the news became public, though not by much. Dollar/yen last traded at 112.22, while euro/yen marginally exceeded the 129 handle. Both pairs are slightly up on the day.
The European Central Bank will shortly complete its monetary policy meeting as well. ECB President Mario Draghi will be attending a press conference following the meeting to explain the reasoning behind the central bank’s decisions. This will be Draghi’s first public appearance following his hawkish-perceived comments in Sintra, Portugal that led the euro to post a strong rally against other major currencies.
Origin: XM
