BOJ Maintains Negative Rates and Adjusts YCC Language in Response to Rising Inflation

The Bank of Japan maintained its ultra-low interest rates on Tuesday while slightly adjusting its stance on the yield curve control (YCC) policy. Additionally, the bank projected higher inflation levels over the next few years.

The BOJ affirmed its commitment to the YCC policy, setting the upper threshold at 1% as a reference point for market operations. This adjustment indicates a subtle shift in the bank’s otherwise rigid approach to YCC, suggesting a degree of flexibility.

In a statement, the BOJ remarked, “With extremely high uncertainties surrounding economies and financial markets at home and abroad, it is appropriate for the bank to increase the flexibility in the conduct of yield curve control.”

As part of its YCC framework, the bank permits interest rates to fluctuate between -1% and 1%, maintaining the current rate without change.

Furthermore, the BOJ plans to continue its existing level of asset purchases and quantitative easing aimed at stimulating the economy, given the ongoing concerns about rising inflation and deteriorating global economic conditions.

This latest move occurs amid the bank’s efforts to balance supporting the Japanese economy and stabilizing the yen while addressing persistent inflationary pressures.

Following the BOJ’s announcement, the yen fell by 0.5%, briefly surpassing the 150 mark against the dollar, as the decision did not meet market expectations for a more aggressive stance. Additionally, the benchmark 10-year yields for Japanese government bonds decreased slightly, remaining below the 1% ceiling.

The BOJ anticipates that core consumer inflation, which excludes fresh food, will stay above the 2% target through fiscal 2024, with risks to prices leaning “upside” for fiscal 2023. The bank also revised its forecast for price increases upward, mainly due to rising import costs being passed on to consumers by local businesses.

Recent statistics indicated that Japanese economic growth exceeded expectations in September, while industry growth also surpassed forecasts in October. Consumer inflation has exceeded the BOJ’s target range for 18 consecutive months.

The central bank has also indicated that downside risks to Japanese economic growth are increasing, especially due to a slowdown in the growth of the country’s main trading partners. This situation reinforces the necessity for ongoing stimulative measures.

Despite some resilience in Japan’s economy this year, the pace of quarter-over-quarter growth has decelerated owing to heightened inflationary pressures. Economic conditions in Japan’s largest export markets have also worsened, presenting further challenges for the world’s third-largest economy.