The Bank of Japan kept interest rates around zero yesterday and highlighted a growing conviction that inflation was on track to durably hit its target of two per cent in coming years, signalling its readiness to hike borrowing costs later this year.
BOJ Governor Kazuo Ueda said the central bank would raise interest rates if fresh data back up its latest price forecasts or if inflation overshoots the projections.
But he offered few clues on when the next rate hike will come and ruled out shifting to a full-fledged reduction in the BOJ’s bond purchases, underscoring its focus on keeping borrowing costs low even at the cost of accelerating yen falls.
The lack of clear guidance on the future rate hike path triggered a broad-based decline in the yen, pushing it down to a fresh 34-year low near 157 to the dollar and keeping markets on edge over a currency intervention.
“The currency takeaway is certainly disappointment from the lack of guidance from the bank,” said Rodrigo Catril, senior FX strategist at National Australia Bank in Sydney.
“To me the currency market is telling us it believes that the BOJ policy is too loose and hence why the currency is so weak. The Bank has the ability to do something about that by changing its policy, and if it’s not going to change the policy, then we shouldn’t expect the yen to strengthen.”
As widely expected, the BOJ maintained its short-term interest rate target at a range of 0-0.1pc, which was set just a month ago when it made a historical exit from its massive stimulus programme and negative interest rates.
The central bank also stuck to its guidance in March about buying government bonds, dashing hopes by some traders that it could soon taper purchases partly to slow the yen’s declines.
Governor Ueda said while the impact of yen moves was usually temporary, its effects on underlying inflation could not be dismissed, especially if it helps push up workers’ wages.