On Thursday, the Bank of Japan (BOJ) maintained its benchmark interest rate at 0.25%, citing uncertainties in Japan’s economic activity and pricing dynamics.
The move comes as the yen weakened 0.3% against the dollar, falling to a one-month low of 155.42, while the Nikkei 225 index slipped 0.85%.
The BOJ’s cautious stance highlights the delicate balance it faces amid inflation pressures and wavering economic resilience.
BOJ surprises markets by holding rates
Economists polled by Reuters had largely anticipated a 25-basis-point rate hike, but the central bank opted for stability, signaling ongoing concerns over the broader economic landscape.
The BOJ board’s decision was not unanimous, with an 8-1 vote where board member Naoki Tamura pushed for a rate increase.
In its statement, the BOJ emphasized that “high uncertainties surrounding Japan’s economic activity and prices” persist.
It also highlighted the growing influence of exchange rate fluctuations on pricing, particularly as firms increasingly raise wages and prices.
The decision contrasts sharply with the US Federal Reserve, which recently cut rates by 25 basis points to a range of 4.25%-4.5%.
Analysts believe the BOJ’s cautious approach reflects its struggle to align monetary policy with government concerns over Japan’s fragile GDP growth, which is projected to turn negative in 2024.
Economic data suggests resilience
Despite the BOJ’s conservative stance, recent data paints a more optimistic picture of Japan’s economic resilience.
Headline inflation stood at 2.3% in October, marking the 30th consecutive month above the central bank’s 2% target.
November’s inflation data, due Friday, will provide further insight into the country’s inflationary trends.
Business sentiment has also shown signs of improvement.
The latest BOJ Tankan survey revealed that the index for large manufacturing firms rose to 14 in the December quarter, surpassing expectations of 12 and improving from 13 in the previous quarter.
This metric, which gauges business sentiment, underscores that optimism currently outweighs pessimism among Japan’s large corporations.
According to a Dec. 13 note by analysts at Bank of America, the Tankan survey suggests that Japan’s economy remains on a stable footing.
They noted that inflation and economic activity are trending in line with the BOJ’s baseline scenario, which could pave the way for future rate adjustments.
However, analysts caution that the urgency for a rate hike is limited.
Imported inflationary pressures have been easing, and companies’ medium-term inflation expectations appear stable.
Japan’s GDP has contracted year-on-year in the first two quarters of 2024, with only a modest 0.5% growth in the third quarter.
With real GDP growth projected to dip into negative territory next year, the BOJ is treading carefully to avoid further economic disruption.
Market watchers will now turn their attention to inflation data and upcoming policy meetings to assess how Japan navigates its economic challenges amid global monetary tightening trends.
The BOJ’s next steps will likely hinge on incoming economic data and global market developments, particularly as exchange rate volatility continues to influence Japan’s inflation trajectory. For now, the central bank appears committed to a cautious, data-driven approach.
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