Japan central bank maintains policy interest rate at minus 0.1%

SINGAPORE (ICIS)–Japan’s central bank decided Friday to maintain its key interest rate at minus 0.1%, defying aggressive hikes by peers in the US and Switzerland, citing some economic weakness stemming from the pandemic and high commodity prices.

To keep the 10-year yields at around zero, the Bank of Japan (BoJ) “will purchase a necessary amount of Japanese government bonds (JGBs) without setting an upper limit”, it said.

Recovery for the world’s third biggest economy is underpinned by waning COVID-19 impact and supply-side constraints, improving external demand, accommodative financial conditions and the government’s economic measures, the central bank said.

A high inflation rate at around 2% is being caused by rising energy and food prices, which may stay for some time “but should decelerate thereafter”, it said.

The central bank’s continued accommodative monetary policy stance, in stark contrast with the US Federal Reserve’s tightening, has been exerting downward pressure on the yen.

The currency tumbled to a 24-year low on 14 June at above yen (Y) 135 to the US dollar, before rebounding to a two-week high of around Y132. At around noon on Friday, the yen was trading at Y134.10.

Switzerland’s central bank surprisingly hiked interest rates by 50-basis points on 16 June – its first in 15 years – taking the cue from the US Fed’s 75bps hike the previous day.

The US dollar, Swiss franc and the Japanese yen are typically considered “safe havens” for investors in times of market turbulence, because of their relative stability compared with other currencies.

Japan central bank’s monetary policy decision was in line with market expectations.

ING Economics had expected the BoJ to remain a “dovish outlier” despite inflation above 2% and a weak yen, the Dutch research firm said in a note released on Friday morning before the BoJ decision.

There were expectations that the BoJ would widen the bandwidth for its yield curve control (YCC) or expand its bond-buying operations from 10 years to other maturities.

ING Economics noted that “the likelihood of such an option is growing”, with the BoJ potentially shifting its stance on the yield curve sometime in the second half of 2022.

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