Investing.com-- The Bank of Japan is widely expected to leave its ultra-dovish policy unchanged at the conclusion of a meeting on Tuesday, amid easing inflation and uncertainty over the economy after a devastating new year’s earthquake.
Focus will be on any cues from Governor Kazuo Ueda on when the bank plans to eventually begin fishing rates out of negative territory.
The BOJ is expected to keep its benchmark interest rate at negative 0.1%, and also maintain its yield curve control mechanism in allowing 10-year yields to fluctuate in a range of negative 1% to 1%, with a target of 0%.
BOJ officials have repeatedly cited the need to maintain ultra-loose policy in order to support Japanese economic growth. Recent signs of easing inflation in the country pointed to less pressure on the central bank to begin immediately tightening policy.
Traders had also begun trimming bets on tighter policy in January after a severe earthquake in central Japan- with rebuilding efforts in the wake of the disaster likely to undermine any major tightening in policy.
“With the economic impact still uncertain and the country engaging in disaster relief efforts currently, it seems rational for the central bank to avoid rocking the boat for now,” analysts at IG wrote in a recent note.
Recent communication from BOJ officials also provided scant cues on a pivot, with Ueda stating earlier in January that he saw no immediate need for tighter monetary policy in the country.
Broader consensus is for the BOJ to begin tightening policy only by the second quarter of 2024, when the bank will have much more economic data to make a decision.
Any interest rate hikes will bring an end to nearly a decade of ultra-loose monetary policy, marking a new era for the Japanese economy as it begins to track tighter monetary conditions across the globe.
Japanese stocks had rallied on the prospect of a dovish BOJ, with the Nikkei 225 surging to 34-year highs and reaching levels last seen before the burst of a massive speculative bubble in the 1990’s.
But the yen had suffered from a widening gulf between local and U.S. interest rates. The Japanese currency was among the worst-performing major global currencies in 2023, with this weakness extending into the new year.
Tokyo consumer price index data due later this week will be a key point of focus for markets and policymakers, given that it is likely to reflect the inflationary impact, if any, of the new year’s earthquake.
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