Image: Reuters Berita 24 English - On Friday, the Bank of Japan is expected to retain ultra-low interest rates and reaffirm its commitment ...
 |
| Image: Reuters |
Berita 24 English - On Friday, the Bank of Japan is expected to retain ultra-low interest rates and reaffirm its commitment to supporting a fragile economy with huge stimulus, a move that might rekindle yen weakness by underlining a policy divergence with the rest of the globe.
While a little technical modification to its yield cap or guidance on the future policy path cannot be ruled out, the BOJ is expected to keep its huge monetary stimulus in place for the time being to ensure the economy is completely recovered.
Following the US Federal Reserve's 75-basis-point boost, central banks throughout Europe raised interest rates on Thursday, some by surprising amounts.
The prospect of Japan becoming an outlier as global central banks tighten policy to combat inflation has pushed the yen to 24-year lows, threatening to reduce consumption by raising already growing import costs.
However, mounting fears over the weak yen haven't stopped the BOJ from ramping up bond purchases to protect an implicit 0.25 percent restriction on its 10-year bond rate objective.
"We anticipate the BOJ to keep working to attain its inflation objective in a stable and sustainable manner," Finance Minister Shunichi Suzuki told reporters on Friday, indicating his support for the central bank's ultra-easy monetary policy.
The BOJ is widely expected to keep its -0.1 percent short-term rate target and resolve to keep the 10-year yield around 0% at its two-day policy meeting, which ends on Friday.
Some analysts believe the central bank's commitment to defend the 0.25 percent upper limit will be strengthened by targeting a broader range of debt maturities for its unrestricted fixed-rate bond-buying operation, which currently only covers 10-year notes.
"The BOJ might include a vow to conduct emergency market operations targeting notes with a broader range of maturities," said Hiroshi Ugai, JPMorgan Securities' top Japan economist.
"The central bank has no alternative but to do this to manage bond market movements," he explained, "even if it probably doesn't want to accelerate the dollar's climb versus the yen."
The yen recovered versus the dollar, which had taken a beating following the Swiss central bank's unexpected rate hike on Thursday. On Friday, it was trading at approximately 132.40 per dollar in Asia.
The BOJ's yield cap has come under fire from investors who believe the central bank would cave in to global market forces as U.S. yields rise, pushing up long-term rates around the world.
On Friday, the 10-year Japanese government bond (JGB) yield jumped to 0.265 percent, above the BOJ's 0.25 percent ceiling and reaching its highest level since January 2016.
"The yen is experiencing short-term upward pressure on expectations," said Masafumi Yamamoto, chief currency strategist at Mizuho Securities. "The BOJ could forsake yield curve control and raise rates."
"However, with little hint of a broad-based acceleration in wage growth, we expect the BOJ to remain loose policy and even increase steps to restrain yield rises," he said.
The BOJ is stuck in a bind. With inflation substantially below that of Western economies, Japan's focus is on using low rates to bolster the still-weak economy. However, the dovish approach has resulted in significant yen depreciation, damaging an economy that is heavily reliant on imported petroleum and basic materials.
BOJ Governor Haruhiko Kuroda has consistently emphasised the importance of maintaining ultra-low interest rates and stated that the central bank will not use currency rates to guide policy.
At his post-meeting conference, Kuroda is expected to caution against a weak yen, highlighting the economic damage that significant losses in the currency could cause, according to analysts.
