No Change in Policy, but BOJ Policymakers ‘Will Not Hesitate’ to Act if Necessary

The Dollar/Yen is trading lower on Tuesday after the Bank of Japan kept its ultra-low short-term interest rate target at -0.10%. The BOJ also left its guidance on interest rates unchanged, and said it intends to keep rates where they are through at least next spring. But the central bank added that it “will not hesitate” to make adjustments if necessary.

The BOJ slightly downgraded its inflation outlook to 1.0 percent for the year to March 2020 and 1.3 percent for the following year, compared with previous forecasts for 1.1 percent and 1.4 percent respectively.

The new inflation figures again fell far short of the two percent inflation that the BOJ has long set as its target – a figure seen as key to firing up the world’s third largest economy – despite a plethora of stimulus attempts and monetary easing packages over the years.

BOJ policymakers said they would continue to monitor “downside risks to economic activity and prices, mainly regarding developments in overseas economies” after their two-day meeting finished on Tuesday.

“The Bank will not hesitate to take additional easing measures if there is a greater possibility that the momentum towards achieving the price stability target will be lost,” it added.

Recently, BOJ Governor Haruhiko Kuroda argued that prolonged periods of low growth and low inflation have created a “deflation mindset” that continues to weigh on the national economy. He further added that Japan’s economy has been on “a moderate expanding trend”.

Investor Expectations

The price action in the Japanese Yen suggests that some speculators were betting on a more dovish Bank of Japan. However, the central bank didn’t fool the professionals. Ahead of the release of its monetary policy statement, “Some 81% of 47 economists surveyed by Bloomberg see the BOJ sticking with its current policy setting at the meeting, while 19% predict additional easing.”

Additionally, a large number of analysts thought the BOJ would want to conserve its scarce firepower for now. About a third of polled analysts expected the central bank to strengthen its pledge to keep rates at extremely low levels at the meeting.

Bloomberg economists said, “We think the BOJ will adopt a wait-and-see strategy ahead of the Federal Reserve’s decision on July 31… The BOJ’s latest growth and inflation outlook and any tweaks to its forward guidance will be a focus.”

The economists may have been right, but it all depends on whether you think “adopt a wait-and-see strategy” means the same at the central bank saying it “will not hesitate” to make adjustments if necessary.