The Bank of Japan holds negative rates while announcing the policy review

Bank of Japan Interest rates were left unchanged At the first political meeting of the newly appointed Governor Kazuo Ueda.

The decision came in line with economists’ expectations of no changes to the benchmark interest rate, which has been fixed at -0.1% since the central bank took interest rates below zero in 2016.

The central bank also kept the tolerance range 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 the tolerance range for 10-year Japanese government bonds from 25 basis points to 50 basis points above and below 0%.

The Japanese yen fell about 0.8% to 134.75 against the US dollar after the announcement. The yield on the 10-year Japanese government bond decreased slightly to 0.425%.

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

The central bank said the planned time frame for the review ranges from one year to a year and a half.

“Achieving price stability has been a challenge for a long period of 25 years,” the central bank said, adding that monetary easing policies “interacted and affected broad areas of Japanese economic activity, prices, and the financial sector.”

in a separate lookThe central bank expected that inflation for all items except for fresh food and energy would be around 2.5% for the fiscal year 2023, and between 1.5% and 2% for the years 2024 and 2025.

Ueda previously emphasized that inflation should be “very strong and close to 2%” – the central bank’s target – before any policy adjustments to yield curve control can be made.

Despite market expectations of the central bank expanding yield curve control tolerance further or abolishing the system entirely, the central bank has stuck to its current policies.

The Bank will continue to QQE (Quantitative and qualitative monetary easing) with yield curve control, with the aim of achieving the objective of price stability for as long as necessary to maintain this objective in a stable manner.”

She added that the central bank “will not hesitate to take additional easing measures if necessary.”

Amy Zee-Patrick, head of income strategies at Pendall Asset Management, predicts that the central bank will abandon YCC rather than extend tolerance.

“I think the next step they take in terms of YCC would be to give up. But the path to that would have to be about getting the markets to realize that it’s more about them worrying about the markets working rather than them worrying about inflation running away from them.” Sheh Patrick told CNBC’s “Street Signs Asia.”

Inflation rose in the Japanese capital in April, according to government data released on Friday before the Bank of Japan’s decision.

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

Excluding fresh food and energy, the Tokyo CPI rose 2.3% in April – just above the central bank’s inflation target of around 2%. Tokyo inflation is a leading indicator of trend nationwide. Core CPI for Japan was at 3.1% in March.

Meanwhile, government data showed that the unemployment rate in Japan rose to 2.8% in March from 2.6% in February. This is higher than Reuters forecasts of 2.5% and marks the highest reading since January 2022.

The country’s job-to-applicant ratio was 1.32, lower than a Reuters estimate of 1.34.

“There is still some uncertainty in the Japanese real economy, but at the same time, inflationary pressures are very imminent,” Hiromi Yamaoka, a former Bank of Japan official and current head of the Institute for the Future Research, told CNBC Asia on Friday ahead of the announcement.

“It’s a difficult situation but the BoJ should pay attention to price stability as the central bank’s primary goal,” Yamaoka said, but added that the central bank needs to focus more on mounting inflation pressures rather than the real economy.

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