Bank of Japan Stands Pat, Keeping Rates Unchanged
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The Bank of Japan (BOJ) on Thursday opted to keep its accommodative monetary policy unchanged, maintaining its key policy rate at 0.25% for the third consecutive meeting, reports Nikkei Asia. The decision, while expected, comes as the Japanese economy shows uneven performance and consumer inflation signals a potential cooling trend.
The BOJ's move, which leaves Japan's inflation-adjusted real interest rates deeply negative, is designed to support borrowing and overall economic activity. However, it also risks further weakening the yen and encouraging capital outflows.
Wednesday's decision by the US Federal Reserve to cut interest rates for the third time this year, bringing its policy rate to 4.25%-4.5%, has already pushed the yen lower against the dollar. Market players anticipate that the widening interest rate differential between the US and Japan will continue to pressure the Japanese currency.
BOJ Governor Haruhiko Ueda is navigating a complex landscape. While core inflation reached 2.3% in October, underlying inflation has been decelerating since late last year and is currently estimated to be between 0.8% and 1.5%. Analysts remain divided on the timing of the BOJ's next rate hike, with some predicting a move as early as next month and others seeing no increase for several months.
The BOJ's accommodative stance has already contributed to a weaker yen, driving up import costs and squeezing profit margins for businesses. Some analysts warn that the yen could test a 37-year low against the dollar in the coming year.
The BOJ is closely monitoring wage growth and consumer inflation for signs of sustained momentum in 2025. However, corporate earnings have been decelerating due to a weaker Chinese economy and uncertainty surrounding the incoming US administration under President-elect Donald Trump, who has threatened tariffs on China, Canada, and Mexico.
The BOJ also appears hesitant to risk disrupting the generally upbeat mood in the stock market. The last rate hike in July triggered an 8% rally in the yen and an 18% sell-off in Tokyo stocks the following week, a memory that analysts believe still weighs on Ueda's decision-making.