BOJ to keep ultra-low rates, dovish stance as inflation clouds recovery

div classBodysc17zpet90 cdBBJodivpBy Leika Kiharap

pTOKYO Reuters – The Bank of Japan is set to maintain ultralow interest rates on Thursday and hold off from major tweaks to its dovish policy guidance, as rising raw material costs force it to focus on underpinning a fragile economic recovery.pdivdivdiv classBodysc17zpet90 cdBBJodiv

pThe BOJ‘s stubborn commitment to its zerorate programme puts it at odds with major central banks that are shifting toward tighter monetary policy, although inflation in Japan is expected to creep up towards the central bank’s 2 target.p

pIn contrast, surging inflation is prodding the U.S. Federal Reserve and the European Central Bank to remove stimulus deployed during the COVID19 pandemic.p

pProspects of aggressive Fed tightening, which would widen the divergence between U.S. and Japanese interest rates, have pushed the yen to twodecade lows against the dollar.p

pSpeculation has been rife the BOJ could allow longterm rates to rise more or tweak its policy guidance to combat yen declines, as some lawmakers fret further falls in the currency could do more harm than good to the economy by inflating import costs.p

pBut with inflation modest compared with other nations and the economy still below prepandemic levels, the BOJ is in no rush to increase borrowing costs or modify a pledge to keep rates at current or lower levels, sources familiar with its thinking have said.p

p“The output gap in Japan is negative, and there is still a long way to go to achieve the 2 target in a stable manner,” BOJ Governor Haruhiko Kuroda said in a speech on Friday.p

p“The Banks role in the current context is perfectly clear: to persistently continue with the current monetary easing centered on yield curve control.”p

pAt a twoday policy meeting ending on Thursday, the BOJ is widely expected to maintain its shortterm rate target at 0.1 and that for the 10year bond yield around 0.p

pIn new quarterly forecasts due after Thursdays meeting, the central bank is expected to raise its inflation forecast for this fiscal year to near 2 reflect rising fuel costs.p

pBut the BOJ will likely cut this years growth estimate on soft consumption and project that prices will moderate next year and beyond, as it views current costpush inflation as transitory.p

pMarkets will focus on Kurodas remarks at his postmeeting news conference for clues on whether and how soon the BOJ could modify its dovish policy guidance.p

pUnder the current guidance, the BOJ says it “wont hesitate to take additional easing steps,” and expects short and longterm policy rates to “remain at their present or lower levels.”p

pSome analysts bet the BOJ could tweak the guidance to a more neutral stance as early as its meeting on Thursday.p

pIn Fridays speech, Kuroda said he saw no need to ramp up stimulus, and that future policy will be datadependent and “nimble.”p

pStill, any change in the guidance will be modest and wont lead to immediate monetary tightening, analysts say.p

p“We dont expect the BOJ to adjust yield curve control this time, as it focuses on risks to the economy rather than rising inflation,” said Hiroshi Ugai, chief Japan economist at JPMorgan Securities, who predicts the central bank could tweak the guidance on Thursday.p

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pp Editing by Jacqueline Wongp

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