by Leika Kihara
TOKYO (Reuters) – Board members of the Bank of Japan (BOJ) agreed that the inflationary impact of the yen’s recent sharp moves should be closely scrutinized, but policymakers reiterated their determination to keep policy loose even as the currency’s rapid decline rattled markets. Finance.
In the minutes of the Bank of Japan’s July policy meeting released on Wednesday, a member said that downward pressure on the yen may ease as the global economic slowdown begins to affect inflation and long-term interest rates worldwide.
Another board member was quoted as saying: “If the global economy is hit by a shock, there is a possibility that the current trend of weak yen will change to that of a strong yen.”
At its July 20-21 meeting, the Bank of Japan predicted inflation would exceed its 2% target this year in new forecasts, but it kept interest rates very low and indicated its intention to keep cash loose.
Analysts blame the very low interest rates of the Bank of Japan for accelerating the decline of the Japanese currency.
In a surprising move last week, the government intervened in the currency market to stem the yen’s weakness by selling dollars and buying yen for the first time since 1998.
The minutes showed that some BOJ board members said at the July meeting that they saw price hikes widen with one seeing a stronger chance that Japan could achieve sustainable inflation backed by higher wages.
A few members also said that rising inflation expectations were lowering real interest rates and boosting the stimulus effect of the Bank of Japan’s ultra-loose policy.
But board members agreed on the need to keep rates very low to ensure Japan sustainably achieves the 2% target backed by higher wages.
One member was quoted as saying, “It is inappropriate to adjust yield curve control because doing so could overburden the economy by increasing long-term interest rates.”
The discussions underscore how BOJ board members see little need to combat sharp declines in the yen by raising interest rates, even as currency declines are exacerbated by diverging monetary policies between Japan and the strong shift in other advanced economies.
Under Yield Curve Control (YCC), the Bank of Japan is capping short-term interest rates at -0.1% and capping the 10-year bond yield at around 0% to reflect growth and sustainably meet the 2% inflation target.
Core consumer inflation accelerated to 2.8% in August, marking its fastest annual pace in nearly eight years and exceeding the central bank’s 2% target for the fifth consecutive month.
But Bank of Japan Governor Haruhiko Kuroda ruled out the chance of a rate hike in the near term, noting that recent rate increases were driven by global commodity inflation and would be short-lived.