Bank of Japan maintains ultra-easy policy amid growing confidence

The Bank of Japan (BOJ) adhered to its anticipated course by maintaining ultra-easy monetary policy on Tuesday. Policymakers are allowing additional time to assess whether wage increases will be extensive enough to sustainably maintain inflation at the 2 per cent target.

Stressing on growing confidence in the conditions for phasing out massive stimulus measures, the central bank noted that the likelihood of the economy achieving a durable 2 per cent inflation rate was "gradually rising."

Market observers are now closely watching Governor Kazuo Ueda's remarks for insights into when the BOJ might lift short-term rates from negative territory. This move is seen as the next step in unwinding the radical stimulus program implemented by Ueda's predecessor.

The BOJ stated in its quarterly outlook report, "Consumer inflation is likely to increase gradually toward the BOJ's target as the output gap turns positive, and as medium- to long-term inflation expectations and wage growth heighten." The report included a new phrase on prospects for hitting the price target, noting that the likelihood of realizing the outlook has continued to gradually rise, despite existing uncertainties.

During the two-day meeting concluding on Tuesday, the BOJ maintained its short-term rate target at -0.1 per cent and the 10-year bond yield target around 0 per cent. Following the decision, the yen experienced a 0.2 per cent decline against the dollar, trading at 148.30.

Izuru Kato, Chief Economist at Totan Research, speculated that the BOJ chose to maintain the status quo to gather more evidence of a sustainable cycle of wage growth and prices before making further moves. Kato anticipates an end to negative rates in April.

In its quarterly report, the BOJ reduced its core consumer inflation forecast for the upcoming fiscal year to 2.4 per cent from the previous estimate of 2.8 per cent in October. The forecast for fiscal 2025 was slightly revised upward to 1.8 per cent from 1.7 per cent. The board retained its forecast that the index measuring trend inflation would reach 1.9 per cent in fiscal 2024 and 2025.

Governor Ueda is expected to hold a press briefing to elaborate on the decision, where market participants anticipate insights into the BOJ's outlook on wage growth and inflation. The meeting precedes those of the European Central Bank and the US Federal Reserve, both of which tightened monetary policy last year and are now contemplating interest rate cuts.

(With Reuters inputs)