Bank of Japan holds rates as fears deepen over growth prospects

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The Bank of Japan held interest rates on Thursday as doubts remained over growth prospects for the global economy and the sustainability of Japan’s wage-driven inflation.

The decision following the BoJ’s final monetary policy meeting of 2024 left its short-term policy rate at 0.25 per cent. In a statement on its outlook, the central bank reiterated its previous warning of “high uncertainties surrounding Japan’s economic activity and prices”.

The BoJ’s decision was further complicated by the US Federal Reserve’s move on Wednesday to cut rates by a quarter of a percentage point, while simultaneously signalling a slower pace of rate cuts next year.

The US dollar rose sharply against the yen, pushing the Japanese currency to a one-month low and underscoring the BoJ’s warning that exchange rate fluctuations were more likely to affect Japanese wages and prices than in the past.

The Japanese central bank’s monetary policy committee was not unanimous, with Naoki Tamura, a former executive at Sumitomo Mitsui Bank, calling for interest rates to rise to 0.5 per cent, arguing that “risks to prices had become more skewed to the upside”.

The two-day meeting also included an extensive review of Japan’s monetary policy history over the 25 years since the economy fell into deflation.

The 200-page analysis concluded that the most intensive period of monetary easing — when the central bank under former BoJ governor Haruhiko Kuroda targeted 2 per cent inflation and undertook a series of unconventional policy experiments — “did not have as large an upward effect on prices as originally expected”. 

The review found that the side-effects of large-scale monetary easing included a negative impact on the functioning of the Japanese government bond market.

“Attention should be paid to the possibility that the negative effects could become larger in the future,” the report concluded, warning of “the possibility that the functioning of the JGB market does not fully recover”.

The BoJ ended its eight-year experiment with negative interest rates in March before raising short-term rates to 0.25 per cent in July, a move that caused ructions in currency and equity markets.

Although many economists now expect the BoJ to raise rates in January, some warned that the decision to hold off for now risked sending a signal to markets that governor Kazuo Ueda’s push to “normalise” Japan’s monetary policy was losing momentum.

Ueda will speak at a press conference later on Thursday.

“In kicking the can further down the road, the risk is that the market begins to doubt the BoJ’s broader commitment to policy normalisation,” said Benjamin Shatil, senior Japan economist at JPMorgan.

The yen weakened 0.5 per cent further to ¥155.3 per dollar on Thursday following the BoJ’s announcement.

Expectations were initially high for a rate rise going into the December meeting, but by this week a majority of economists anticipated that the BoJ would wait until January.

They pointed to uncertainties in Japanese politics, where Prime Minister Shigeru Ishiba is holding together a weak coalition, and Donald Trump’s impending second term as US president.

In a note to clients following the BoJ’s decision, Marcel Thieliant, head of Asia-Pacific at Capital Economics, who noted that he had been among the minority expecting a 25 basis-point rise, said “the flow of data in recent months clearly warranted further tightening”.

“However, it’s plausible that the Board wants to wait for a new round of forecasts — which will only be published in January — before stepping on the brakes once again,” he added.