by Leika Kihara
TOKYO (Reuters) – The Bank of Japan is set to maintain ultra-low interest rates and its pessimistic policy guidance on Thursday, a decision that comes hours after an expected rate hike from its US counterpart and could trigger a new wave of yen selling.
The policy gap between the Bank of Japan (BOJ) and the US Federal Reserve pushed the yen to a 24-year low, driving up import costs and helping inflation stay above the BOJ’s 2% target for five consecutive months in August.
Markets are focused on whether Bank of Japan Governor Haruhiko Kuroda will provide stronger warnings about sharp falls in the yen or modify his view that recent cost-push inflation will be short-lived.
“Consumer price inflation in Japan is rising faster than expected, in part due to the weak yen. It has become difficult for the BoJ to continue saying that the price hike will remain temporary,” said Mari Iwashita, chief market economist at Daiwa Securities.
At the two-day policy meeting that ends on Thursday, the Bank of Japan is set to keep its short-term interest rate target at -0.1% and the 10-year government bond yield around 0%. Kuroda will hold a press conference after the meeting.
The BOJ’s decision will come hours after the Federal Reserve concluded its September 20-21 meeting. Market players expect the US central bank to raise interest rates by at least 75 basis points.
“Major central banks such as the Federal Reserve and the Bank of England are on the cusp of continuing to shrink their balance sheets. This puts the BoJ’s pessimistic stance even more in the spotlight,” Iwashita said. “I don’t think the dollar’s bullish trend is over.”
The country’s fragile recovery has forced the Bank of Japan to stay out of the global wave of central banks tightening monetary policy to combat rising inflation.
While Kuroda echoed the government’s warning of sharp moves in the yen, he vowed to keep monetary policy too loose to support the economy – and critics say the comments mitigate the effect of government officials’ confusion to tame the yen’s slump.
At the policy meeting, the Bank of Japan is expected to finalize as scheduled its pandemic relief financing plan this month and discuss adjustments to policy guidance that the COVID-19 pandemic is the biggest economic risk.
But sources told Reuters that the Bank of Japan is likely to leave key parts of the guidance, which promise to ramp up stimulus as needed and keep interest rates at “current or low” levels, unchanged.