Source: AFP
The Bank of Japan left interest rates unchanged on Friday after a decision to raise them in July pushed the yen sharply higher and sparked jitters in global markets.
Two days after the US Federal Reserve cut interest rates for the first time since the start of the pandemic, the BoJ’s stance came as data showed inflation in the world’s fourth-largest economy rose as expected in August.
Bank of Japan officials said borrowing costs would remain at 0.25 percent, a policy decision that had been widely anticipated after the fallout from a previous hike.
UBS economists Masamichi Adachi and Go Kurihara said this week they see “no reason for the Bank to raise its interest rate, which could surprise the market and the public again, especially when market sentiment is still cautious ».
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The BoJ has long been an outlier among major central banks — sticking to ultra-loose monetary policy in a bid to see demand-driven inflation of two percent fueled by wage rises.
Price rises have been above this target since April 2022 — they accelerated slightly to 2.8% in August — but the BoJ questioned the extent to which this was driven by temporary factors such as the war in Ukraine.
The BoJ raised borrowing costs in March for the first time since 2007 and again in July, signaling more was on the cards.
The move, which surprised investors, came on the same day the Fed signaled it was ready to start tapering and was followed by a big shortfall in US job creation.
That sent markets into a tizzy on worries about a US recession and as traders began massive “carry trades” in which they used the yen to buy higher-yielding assets such as stocks.
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The yen, which in July had just hit a four-decade low against the dollar, soared and global stocks sold off on Aug. 5, which saw Tokyo’s Nikkei 225 fall more than 12 percent — its worst day since Black Monday in 1987.
Japanese stocks have since recovered but remain volatile.
The sharp slide prompted BoJ deputy governor Shinichi Uchida to signal there would be no further rate hikes until financial markets stabilise.
But about 70 percent of economists surveyed by Bloomberg expect another hike by December.
Capital Economics predicted the next rate hike would come in October as inflation was likely to remain close to the BoJ’s two percent target “until early 2025”.
Stefan Angrick at Moody’s Analytics noted caution as “deeper price readings have slowed for most of the past year given the virtual absence of demand-driven price pressures.”
“The central bank has made it clear that it will raise interest rates. At best, rate hikes will be an additional drag on growth. At worst, they could precipitate a broader recession,” he warned.
Source: AFP
