BOJ maintains loose policy, expects 2% inflation target
The Bank of Japan (BOJ) expects the 2% inflation target to be gradually achievable. They decided to maintain their ultra-loose monetary policy, keeping interest rates at -0.1% and adhering to the yield curve control policy. Governor Kazuo Ueda stated that the economy is moving in line with their inflation projections, with core-core inflation forecasted at 1.9%. The BOJ's decision was in line with economists' expectations. The yen strengthened against the dollar, and the Nikkei 225 closed slightly lower.
In its quarterly outlook, the BOJ lowered its median growth forecast for core consumer prices for the upcoming fiscal year to 2.4%, attributing the revision to a decline in oil prices. They slightly increased the core CPI inflation estimate for fiscal 2025 to 1.8%. The BOJ expects underlying CPI inflation to gradually increase as the output gap turns positive and inflation expectations and wage growth rise. However, uncertainties remain regarding future developments.
The Japanese core CPI decelerated to 2.3% in December but has remained above the BOJ's 2% target for 21 consecutive months. Ueda noted that recent fluctuations in service prices are influenced by temporary factors and weak consumption but believes that service inflation is gradually accelerating. The focus will be on whether wage increases will translate into higher prices, particularly in the service sector.
The market consensus expects the BOJ to normalize rates at the April meeting, contingent upon substantial wage increases during the spring wage negotiations. Ueda mentioned the importance of positive real wages and stated that negative real wages currently would not necessarily prevent the normalization of monetary policy if there is a foreseeable shift to positive real wages.
Regarding the asset-buying framework, the BOJ will assess whether to maintain or discontinue it if sustainable 2% inflation is expected. They also intend to avoid significant disruptions in their bond-buying operations.
In conclusion, the BOJ's decision reflects their confidence in gradually achieving the inflation target. The outlook relies on factors such as positive wage-inflation dynamics, increased consumption, and sustained economic growth.
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