Japan’s new central bank governor sticks to negative rates, announces policy review

The Bank of Japan left interest rates unchanged during the first political meeting of the new governor Kazuo Ueda.

The decision was in line with economists’ expectations of maintaining the benchmark interest rate, which has been kept at -0.1% since the central bank took rates below zero in 2016.

The central bank also kept the tolerance band for 10-year Japanese government bonds unchanged at 50 basis points above and below its 0% target.

In December, the central bank shocked global bond markets by unexpectedly widening its tolerance band for 10-year Japanese government bonds 25 basis points to 50 basis points above and below 0%.

The Japanese yen weakened 0.8% to 134.75 against the US dollar after the announcement.

While maintaining its current policies, the Bank of Japan said it “decided to conduct a thorough review” of its easing measures.

The central bank said the expected time frame for the review is about one to one and a half years.

“Achieving price stability has been a challenge for a long period of 25 years,” the central bank said, adding that its monetary easing policies “have interacted with and influenced broad areas of economic activity, price and financial sector in Japan”.

From a separate perspectivethe central bank forecasts inflation for all items excluding fresh food and energy around 2.5% for the 2023 financial year, and between 1.5% and 2% for 2024 and 2025.

Ueda has already underline inflation must be “fairly strong and close to 2%” – the central bank’s target – before making adjustments to the yield curve control policy.

Inflation in Japan’s capital rose in April, according to government data released Friday ahead of the BOJ’s decision.

The consumer price index in Japan’s capital rose 3.5% in April, beating a Reuters poll forecast for a 3.2% increase. This figure is also slightly higher than the reading of 3.2% in March.

Excluding fresh food and energy, Tokyo’s consumer price index rose 2.3% in April, slightly above the central bank’s inflation target of around 2%.

Inflation in Tokyo is a leading indicator of the national trend. Japan’s national core CPI was 3.1% in March.

Local journal Sankei reported earlier this week that the Bank of Japan is expected to launch a policy review to “understand the reasons behind Japan’s stagnating economy and design more effective measures” under Ueda.

Meanwhile, Japan’s unemployment rate rose from 2.6% in February to 2.8% in March, according to government data.

That’s higher than Reuters’ forecast for 2.5% and marks the highest reading since January 2022.

The country’s job-to-candidate ratio was 1.32, below Reuters’ estimate of 1.34.

“There remains some uncertainty in Japan’s real economy, but at the same time inflationary pressures are becoming more imminent,” Hiromi Yamaoka, a former Bank of Japan official and current director of the Future Institute of Research, told “Squawk Box” from CNBC. Asia” on Friday ahead of the announcement.

“It’s a difficult situation, but the BOJ should pay attention to price stability as a central bank’s main objective,” Yamaoka said, adding that the central bank should focus more on heightened inflationary pressures. than on the real economy.

In order to juggle the two, Yamaoka said “they cannot continue the current extraordinary intervention in the JGB market.”