(July 31): The Bank of Japan (BOJ) kept its policy settings unchanged while nudging its economic growth forecast higher, signalling confidence that the economy remains on track for further policy normalisation after it lifted its benchmark rate last month to the highest since 1995.
The BOJ held its policy rate steady at 1%, according to its statement on Friday, in an outcome predicted by all 52 economists surveyed by Bloomberg. The vote was 8-1 as Hajime Takata called for a back-to-back rate hike.
The central bank continued to flag the risk of underlying inflation overshooting its 2% target as it pledged to keep raising borrowing costs in response to economic and price trends.
The bank also tweaked its assessment of the risk balance for economic growth, saying risks are balanced rather than skewed to the downside. That suggests the drag stemming from the Middle East conflict isn’t as impactful as authorities initially feared it would be, with the boost from global demand for artificial intelligence cushioning the shock.
All told, the messaging from governor Kazuo Ueda’s board suggests it’s on track for another rate move as the yen’s persistent decline risks intensifying inflationary pressures. Investors who are increasingly pricing in a policy shift by October will look for clues to validate that view when Ueda holds a press conference this afternoon.
In newly released quarterly economic projections, the board’s median estimates of GDP growth for this year and next, saying it now predicts a 0.6% expansion this fiscal year. The bank revised its key inflation forecast lower to 2.5% from 2.8%, citing the effects of government subsidies. Those projections are mostly in line with expectations among economists surveyed by Bloomberg.
The yen weakened a tad to around 160.88 against the dollar shortly after the BOJ’s decision. Authorities stepped into the market in New York trading on Thursday, according to a market participant familiar with the matter, sending the yen as much as 3.3% higher versus its US counterpart.
Japanese authorities refrained from confirming that they intervened during overnight trading, but top currency bureaucrat Atsushi Mimura said on Friday that Japan is getting more than just moral support from the US.
Currency traders will be watching to see if Ueda’s remarks disappoint investors by sounding overly dovish as he explains the rationale for holding settings steady.
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