Bank of Japan Maintains Monetary Policy, Revises Inflation Forecasts Upward

The Bank of Japan (BOJ) maintained its current monetary policy on Friday, keeping its benchmark interest rate range between 0% and 0.1% and stating it will continue to purchase long-term government bonds at a pace of around ¥6 trillion per month, in line with its March decision. However, the central bank revised its inflation forecasts upward for fiscal years 2024-2026 in its latest quarterly Outlook for Economic Activity and Prices report.

The BOJ now expects core consumer price inflation, excluding fresh food, to hit 2.8% in fiscal 2024, up from its previous forecast of 2.4%. For fiscal 2025, the inflation projection was increased to 1.9% from 1.8%. The central bank also provided its first projection for fiscal 2026, expecting inflation to be around 2%. "The virtuous cycle between wages and prices has continued to strengthen," BOJ Governor Kazuo Ueda noted in a statement following the policy decision.

Despite the upward revisions to inflation forecasts, the BOJ maintained its accommodative monetary policy stance. Ueda emphasized that it is premature to consider further interest rate hikes at this point, stating, "The key is whether any upward price pressure would feed through to broader inflation and wage growth." The governor indicated that the BOJ will scrutinize economic and price developments to determine the appropriate timing for any future policy adjustments.

Why this matters: The Bank of Japan's decision to maintain its monetary policy and revise inflation forecasts upward has significant implications for the Japanese economy and global financial markets. As major central banks worldwide grapple with balancing inflation control and economic growth, the BOJ's position highlights the unique challenges faced by Japan in its path towards sustainable inflation and wage growth.

The BOJ's policy meeting comes amid growing concerns over the continued weakening of the Japanese yen, which fell to a fresh 34-year low against the US dollar following the announcement. Ueda acknowledged the potential impact of the weak yen on future policy decisions, noting that while the yen's depreciation has not significantly affected underlying inflation so far, exchange rate volatility could have a substantial effect on Japan's economy and prices. The governor stated, "Exchange rate volatility could be a reason to adjust policy if the impact is hard to ignore."

Key Takeaways

• BOJ maintains current monetary policy, keeps interest rate at 0-0.1%.
• BOJ revises inflation forecasts upward for FY2024-2026, expects 2% in FY2026.
• BOJ says wage-price cycle strengthening, but premature to consider rate hikes.
• BOJ acknowledges weak yen's impact, says exchange rate volatility could affect policy.
• BOJ's policy decision has significant implications for Japanese economy and markets.