BOJ set to maintain ultra-low rates, sound warning over weak yen

“The Bank of Japan (BOJ) is likely to maintain ultra-low interest rates on Friday and stress its resolve to support a fragile economy with massive stimulus, a move that may further weaken the yen by highlighting a policy divergence with the rest of the world,” said Reuters ahead of Friday’s BOJ monetary policy announcement.

Key quotes

While a modest, technical tweak to its yield cap or guidance on the future policy path cannot be ruled out, the BOJ is seen sustaining its massive monetary support for now to ensure the economy is fully out of the doldrums.

At the two-day policy meeting ending on Friday, the BOJ is widely expected to maintain its -0.1% target for short-term rates and its pledge to guide the 10-year yield around 0%.

The central bank may also deepen its resolve to defend the 0.25% upper limit by targetting a wider range of debt maturities for its unlimited fixed-rate bond-buying operation, which currently covers only 10-year bonds, some analysts said.

The BOJ is caught in a dilemma. With Japan’s inflation well below that of Western economies, its focus is to support the stil-weak economy with low rates. But the dovish policy has triggered sharp yen falls, hurting an economy heavily reliant on fuel and raw material imports.

BOJ Governor Haruhiko Kuroda has repeatedly stressed the need to keep interest rates ultra-loose, and that the central bank won’t target exchange-rates in guiding policy.

Prime Minister Fumio Kishida appeared to defend Kuroda’s stance. In a news conference on Wednesday, Kishida said the BOJ will likely take into account various factors besides yen moves, such as the impact on small firms’ borrowing costs, in setting policy.

Kuroda is likely to warn against a weak yen at his post-meeting briefing, such as by highlighting the damage the currency’s sharp falls could inflict on the economy, analysts said.

USD/JPY pares recent losses

USD/JPY picks up bids to refresh intraday high around 132.70 by the press time. The yen pair’s latest gains could also be linked to the market’s consolidation amid a quiet Asian session on Friday.

Also read: USD/JPY stays defensive above 132.00 on softer yields, BOJ, Fed’s Powell eyed