Friday, December 1, 2023

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    Bank of Japan Maintains Ultra-Loose Monetary Policy as Inflation Persists

    In the intricate realm of monetary policy, Bank of Japan Governor Kazuo Ueda has made a resolute statement, deferring market expectations and resolutely maintaining the central bank’s ultra-loose monetary policy. In an era where inflation has become an enigmatic puzzle, Ueda’s words sent shockwaves through financial markets, particularly impacting the value of the yen.

    The Bank of Japan’s recent announcement, following a two-day monetary policy committee meeting, has left many on the edge of their seats. Despite Japan grappling with persistent rising prices, Ueda asserted, “We have yet to foresee inflation stably and sustainably achieve our target, and that is why we have to patiently maintain ultra-loose monetary policy.” The central bank, it seems, is steadfast in its resolve until the elusive 2% inflation target is well within sight.

    Ueda’s words were not just rhetoric; they bore immediate consequences. The yen, reacting swiftly, tumbled to ¥148 per dollar within mere minutes of his statement. While the decision to maintain the easing stance was widely anticipated, the financial world was keenly watching for Ueda’s insights on inflation, as Japan faces the challenge of persistent price growth, a phenomenon unseen for decades. Official data released earlier showed that consumer price growth had exceeded the 2% target for a staggering 17 consecutive months.

    In the lead-up to the decision, the yen experienced turbulent trading as investors bet on the growing interest rate divergence between the hawkish US Federal Reserve and the still-dovish Japanese central bank. This week, the Fed maintained its benchmark rate at a 22-year high of 5.25-5.5%, signaling a commitment to elevated borrowing costs.

    In contrast, the Bank of Japan retained short-term interest rates at minus 0.1% and held firm on its yield curve control program, meticulously limiting returns on the benchmark 10-year Japanese government bond within a narrow band around a zero target. The central bank had previously allowed this band to expand to 1% in July, resulting in a gradual uptick in yields. This week, the 10-year JGB yield reached 0.72%, marking its highest level since January 2014, yet no adjustments were made to the Yield Curve Control on this occasion.

    The depreciation of the yen has raised concerns, and expectations are mounting that Japanese authorities may intervene if the currency continues to plummet excessively and rapidly, particularly if it breaches the ¥150 mark. During Ueda’s press conference, the yen slid to more than ¥148.30 per dollar. Hirofumi Suzuki, chief foreign exchange strategist at Sumitomo Mitsui Banking, cautioned that if the yen’s decline persists, last year’s low of ¥152 could soon come into view.

    However, it’s crucial to note that the Bank of Japan is unlikely to counter the weakening yen with interest rate hikes or other monetary policy measures. Instead, observers are keen to see the level of vigilance the BoJ exhibits in response to evolving financial market dynamics.

    Prime Minister Fumio Kishida has reiterated his commitment to monitoring currency movements closely, echoing the assurances from Chief Cabinet Secretary Hirokazu Matsuno, who has emphasized that no options are off the table when it comes to curbing volatility.

    As the months unfold, the complexity of the Bank of Japan’s position becomes increasingly apparent, highlighted by the August inflation data. The “core” index, which excludes volatile fresh food prices, expanded by 3.1% year-on-year in August, mirroring July’s rate precisely. What’s even more revealing is “core-core” inflation, which strips out energy and serves as a close indicator of underlying inflationary trends. In August, it stood at 4.3%, identical to the figure recorded in July, demonstrating the persistence of price growth that consistently surpasses the target.

    “We expect inflation to ease from here, but the pace of deceleration will be slow as past producer price increases are fed through to consumers,” noted Stefan Angrick, senior economist at Moody’s Analytics. This intricate web of data further complicates the already intricate picture of monetary policy.

    The Bank of Japan’s steadfast commitment to maintaining ultra-loose monetary policy in the face of persistent inflation raises questions about the central bank’s future moves and the potential impact on the yen. As global financial markets remain in flux, all eyes are on Japan, awaiting developments that could reshape the economic landscape.

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