Bank of Japan says super-low rates to last another year, giving first timeframe
TOKYO (Reuters) – The Bank of Japan put a time frame on its forward guidance for the first time by telling investors that it would keep interest rates at super-low levels for at least one more year, in a move to dispel any doubt over its commitment to ultra-loose policies.
The BOJ held its monetary policy steady at a rate review on Thursday, but Governor Haruhiko Kuroda said rates could be kept ultra-low even longer, as weaker global demand and Sino-U.S. trade tensions were taking a toll on the export-reliant economy.
“Global economic uncertainties have drawn attention, so we wanted to clarify that we will keep rates low for a very long time,” Kuroda told a briefing.
“Current very low rates will be maintained at least until the spring of 2020, he said. “But the timeframe could be much longer than that” if the economy weakens, he added.
The BOJ’s dovish message puts it in line with the Federal Reserve and the European Central Bank, which have been forced to pause efforts to scale back crisis-mode policies due to heightening uncertainty over the global economic outlook.
“The fact the BOJ tweaked its forward guidance to include overseas economies signaled its caution over the economic outlook,” said Yoshimasa Maruyama, chief market economist at SMBC Nikko Securities.
“As the global economy slows further, the Federal Reserve could cut interest rates later this year or early next year. The BOJ may be forced into further easing around the same time.”
As widely expected, the BOJ maintained its short-term rate target at minus 0.1 percent and that of long-term yields around zero percent. It also reiterated it will keep buying assets such as government bonds and exchange-traded equity funds.
In fresh projections released on Thursday, the BOJ slightly cut its economic growth and inflation forecasts for the fiscal year beginning in April 2020.
The BOJ also forecast consumer inflation would hit 1.6 percent the following year, conceding that price growth will fall short of its target for at least three more years. Core inflation in March was 0.8 percent.
Under the new guidance, the BOJ said it will maintain current extremely low short- and long-term rates “for an extended period of time, at least through around spring 2020.”
Previously, the BOJ did not offer specifics on how long it would maintain very low rates, saying only that it would be “for an extended period of time.”
The BOJ said it decided to clarify its guidance to show its resolve to maintain powerful easing, as it was likely to take more time for inflation to hit its 2 percent target.
“Given uncertainty over the outlook, we have no intention of raising interest rates at least until the spring of 2020,” Kuroda said. “I don’t believe we must review our interest rate targets at all cost straight after the spring of 2020.”
The BOJ also announced steps to make its easing framework more sustainable, such as expanding the type of collateral it accepts for supplying funds to financial institutions.
Years of heavy money printing have failed to fire up inflation to the BOJ’s target and left it with little ammunition to fight the next recession.
Prolonged easing has also added to stresses on regional banks, already facing slumping profits due to an ageing population and an exodus of borrowers to big cities.
Kuroda said regional banks could do more to boost profits, through mergers and consolidation, suggesting the BOJ would not raise rates just to ease banks’ pain.
“We will adjust monetary policy swiftly if necessary to sustain the economy’s momentum for achieving our price goal,” he said, signaling the BOJ’s readiness to ease more.
But Norio Miyagawa, senior economist at Mizuho Securities, said the fact the BOJ did not ramp up asset purchases showed it was aware of the growing side-effects of prolonged easing.
“The BOJ is worried that consumer prices may not rise even after risks posed by overseas economies recede,” he said.
“It’s saying it will continue to keep policy easy but there are limits to what more it can do, both in terms of duration and the kinds of tools available.”
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