Asia Economy

Bank of Japan raises inflation forecast, keeps policy steady

Key Points
  • The Bank of Japan raised its inflation forecast on Thursday, but maintained ultra-low interest rates and warned of risks to the economic outlook in a sign it will remain an outlier among a global wave of central banks tightening monetary policy.
  • "For the time being, while closely monitoring the impact of Covid-19, the bank will support financing... and will not hesitate to take additional easing measures if necessary," the BOJ said in a statement announcing the decision.
The Bank of Japan (BOJ) headquarters in Tokyo, Japan, on Monday, April 25, 2022.
Toru Hanai | Bloomberg | Getty Images

The Bank of Japan raised its inflation forecast on Thursday but maintained ultra-low interest rates and warned of risks to a fragile economy, reinforcing its position as an outlier in a wave of global central bank policy tightening.

The decision came hours before that of the European Central Bank, which will consider a bigger-than-expected 50 basis point rate increase to tame soaring inflation.

While rising fuel and commodity costs have pushed Japan's inflation above its 2% target, the BOJ has repeatedly said it was in no rush to withdraw stimulus as slowing global growth cloud the outlook for the still-weak economy.

"Uncertainty surrounding Japan's economy is very high. We must be vigilant to financial and currency market moves, as well as their impact on the economy and prices," the BOJ said in a quarterly report issued after the decision.

As widely expected, the BOJ maintained its -0.1% target for short-term rates and that of 10-year bond yields around 0%.

In fresh quarterly projections, the board raised to 2.3% from 1.9% its core consumer inflation for the current fiscal year ending in March 2023. It also raised its inflation forecast for the following year to 1.4% from 1.1%.

But the BOJ cut this fiscal year's growth forecast to 2.4% from 2.9% and warned of the potential blow from lingering supply constraints, rising commodity prices and the pandemic.

At a post-meeting briefing, BOJ Governor Haruhiko Kuroda is expected to repeat his resolve to maintain ultra-low rates until the recent cost-push inflation is accompanied by stronger wage and demand growth.

The pace of monetary policy tightening is picking up around the world, says economist
The pace of monetary policy tightening is picking up around the world: Economist

Swimming against the global tide of monetary tightening, however, is not without cost. The policy divergence has pushed the Japanese yen to 24-year lows, hurting households and retailers by boosting already surging import costs.

That impact was highlighted in data out earlier Thursday, which showed Japan ran a trade deficit for the 11th straight month in June as imports jumped 46.1% year-on-year, boosted by a weaker yen.

Recent BOJ data showed the central bank was forced to gobble up a record 16 trillion yen ($116 billion) worth of Japanese government bonds (JGB) in June to defend its 0.25% cap for the 10-year yield.

The aggressive buying pushed the BOJ's ownership of the bond market past 50%, rolling back its efforts to gradually taper its huge balance sheet and causing strain in the futures market.

Markets are focusing on what Kuroda would say about the rising cost of prolonged easing and any hints he could drop on the potential trigger of a policy tweak, analysts say.