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Moving against global tide, BOJ set to keep ultra-low rates, dovish guidance -Breaking


© Reuters. FILEPHOTO: Businessman walking near Bank of Japan headquarters, Tokyo, Japan. February 15, 2016. REUTERS/Thomas Peter/File Photo

By Leika Kihara

TOKYO (Reuters – The Bank of Japan plans to keep ultra-low rates at a record low on Thursday. They also warn of increased risks from rising raw materials costs. It is signaling its determination to increase growth by massive monetary stimulation.

The BOJ’s support for its zero-rate program puts it against major economies. But, Japan’s inflation will likely rise towards the central banks’s 2% target.

Sources tell Reuters that the BOJ expects core consumer inflation to rise near 2% during the quarter ending Thursday’s two-day meeting.

However, the board projects that inflation will moderate in the next year and is concerned about the risks associated with soaring raw materials costs and China’s slowdown.

Japan has been slowing in recovering from the COVID-19 pandemic. Therefore, BOJ will likely keep unchanged its short-term target rate of 0.1% and the 10-year yield target at 0%.

The central bank won’t likely make major changes in itsdovish guidance, which promises to boost stimulus if required and maintain current interest rates or lower.

Rising costs will drive an expected increase in Japan’s inflation rate. This is why it won’t be sustainable. In a speech, BOJ Governor Haruhikokuroda stated that there is no problem in maintaining monetary easing.

There has been speculation that the BOJ may allow longer-term rates rise further or adjust its dovish guidance for combating yen drops. Some lawmakers worry about the possibility of further currency falls, which could lead to higher import prices and further economic damage.

Fumio Kishida, the Prime Minister of Japan, said Tuesday that he expected the BOJ to continue its efforts at achieving 2% inflation. It is clear the government will not pressure the bank to increase rates to curb yen fall.

The market will be focusing on Kuroda’s comments at the post-meeting briefing to see if and when the BOJ might change its dovish policy direction.

Japan’s economy is expected to slow in the second quarter. It will only see modest growth in April-June as consumers are more cautious about the potential pandemic and higher living expenses.

The core consumer inflation rate, currently at 0.8%, will rise to around 2.2% by April. However, the increase will be driven more by higher fuel prices and the dissipating effects of the past cellphone fees cuts.