The Bank of Japan maintains its ultra-loose monetary policy amid “extremely high uncertainties” –

Bank of Japan (BOJ) Governor Kazuo Ueda gestures as he speaks during a press conference at the central bank’s headquarters in Tokyo, Japan, Tuesday, Oct. 31, 2023.

Kiyoshi Ota | Bloomberg | Getty Images

Amid “extremely high uncertainties” affecting the world’s third-largest economy, Japan’s central bank is expected to leave its ultra-loose monetary policy unchanged at its final policy meeting this year, postponing possible easing until the new year.

The Bank of Japan has unanimously decided to keep interest rates at -0.1% while sticking to its yield curve control policy, which keeps the cap on the benchmark 10-year Japanese government bond yield at 1%.

“Given the extremely high uncertainties surrounding economies and financial markets at home and abroad, the Bank will patiently continue to ease monetary policy while responding flexibly to developments in economic activity and prices as well as financial conditions,” the Bank of Japan said on Tuesday in a policy statement.

The Japanese yen weakened after the BOJ decision, trading at around 143.5 against the greenback in midday trading, while the Nikkei 225 stock index climbed 1%. Japanese 10-year government bond yields remained broadly unchanged.

With a possible shift away from the Bank of Japan’s ultra-loose monetary policy challenged by a slowing economy and cooling inflation, most economists expect Gov. Kazuo Ueda to make changes only next year, once annual wage negotiations take place Spring confirms a trend towards significant wage increases.

Ueda will meet the press in Tokyo later on Tuesday, where he may provide guidance on the BOJ’s future course of action.

Ueda’s comments in early December raised expectations of a change in monetary policy and triggered a rally in the yen. The BOJ has been cautious about scrapping its long-held ultra-loose monetary policy, worried that a premature move could jeopardize recent improvements that have been emerging.

On Friday, Japan’s central bank also said it expects core inflation – which it defines as inflation that excludes food prices – to remain above 2% through fiscal 2024. Although core inflation has exceeded its stated 2% target for 19 consecutive months, the BOJ has “patiently continued” with its highly accommodative monetary policy.

So-called “core inflation” — inflation minus food and energy prices — has now exceeded the BOJ’s 2 percent target for 13 straight months.

The BOJ prefers inflation to be driven by domestic demand, which is more sustainable and stable. The bank assumes that wage increases would lead to a more sensible spiral and encourage consumers to buy.

Japan’s umbrella union Rengo said in October it would demand wage increases of at least 5% in wage negotiations next spring. At this year’s talks in March, the union managed to secure its biggest wage increase in three decades.

The BOJ’s monetary policy is complex and multifaceted due to the various quantitative easing tools it has used over the past three decades to revive the world’s third-largest economy.

Their super-loose stance also makes them a special case at a time when other major central banks have raised interest rates to combat stubbornly high inflation. This policy divergence was partly responsible for the pressure on the Japanese yen and government bonds.

This is a developing story. Please check back for further updates.