Bank of Japan expected to stick to ultra-low interest rates, ignoring global rate hike spree

© Reuters. A man walks past the Bank of Japan headquarters in Tokyo, Japan, June 17, 2022. REUTERS/Kim Kyung-Hoon

by Leika Kihara

TOKYO (Reuters) – The Bank of Japan will maintain ultra-low interest rates and dovish policy guidance on Thursday, a decision that came hours after the U.S. central bank expected a sharp rate hike and could spark a fresh sell-off in the yen.

The policy gap between the Bank of Japan (BOJ) and the Federal Reserve has pushed the yen to a 24-year low, pushing up import costs and helping inflation stay above the BOJ’s 2 percent target for five straight months in August.

Markets are watching whether BOJ Governor Haruhiko Kuroda will issue a stronger warning about a sharp fall in the yen or adjust his view that cost-push inflation will be short-lived in the near term.

“Consumer inflation in Japan has risen faster than expected, partly due to a weak yen. It is increasingly difficult for the BOJ to continue to say that price increases will remain temporary,” said Mari Iwashita, chief market economist at Daiwa Securities.

At its two-day policy meeting that ends on Thursday, the Bank of Japan will maintain its short-term interest rate target at -0.1% and keep the 10-year government bond yield around 0%. Kuroda will hold a press conference after the meeting.

The BOJ’s decision will be released hours after the Fed wraps up its Sept. 20-21 meeting. Market participants expect the U.S. central bank to raise rates by at least 75 basis points.

“Major central banks such as the Fed and the Bank of England are about to continue shrinking their balance sheets. This brings further attention to the Bank of Japan’s dovish stance,” Iwashita said. “I don’t think the dollar’s uptrend is over.”

The country’s fragile recovery has forced the Bank of Japan to remain an outsider amid global central banks tightening monetary policy in response to a wave of soaring inflation.

While Kuroda has responded to the government’s warnings about the yen’s sharp swings, he has pledged to maintain ultra-easy monetary policy to support the economy – comments that critics say undercut warnings by government officials to curb the yen’s depreciation.

At its policy meeting, the Bank of Japan is expected to end a pandemic relief funding program on schedule this month and discuss changes to policy guidance that flagged the COVID-19 pandemic as the biggest economic risk.

But sources told Reuters that the BOJ is likely to leave key parts of its guidance unchanged, which promise to increase stimulus as needed and keep interest rates at “current or lower” levels.

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