Bank of Japan keeps interest rates steady, flags global risks

The Bank of Japan maintained ultra-low interest rates on Thursday but said risks surrounding the US economy were somewhat subsiding, signalling that conditions are falling into place to raise interest rates again.

The central bank also projected inflation to move around its 2 per cent target in coming years, stressing its resolve to keep hiking borrowing costs if the economy sustains a moderate recovery.

“Looking at domestic data, wages and prices are moving in line with our forecasts. As for downside risks to the US and overseas economies, we’re seeing clouds clear a bit,” Governor Kazuo Ueda told a news conference.

Ueda’s remarks were less dovish than those made before Thursday’s meeting that the BOJ can “afford to spend time” scrutinising the fallout from risks such as US economic uncertainties and volatile financial markets.

“As for the timing of the next rate hike, we have no preset idea. We will scrutinise data available at the time of each policy meeting, and update our view on the economy and outlook, in deciding policy,” Ueda said on Thursday.

As widely expected, the BOJ kept short-term interest rates at 0.25 per cent at its two-day meeting, its first since an inconclusive general election that analysts say will complicate efforts to normalise interest rates after years of ultra-easy policy.

The board cut its core consumer inflation forecast for fiscal 2025 to 1.9 per cent from 2.1 per cent in the previous estimate in July, but said risks were skewed to the upside for that year. It kept unchanged its fiscal 2026 core inflation forecast at 1.9per cent .

It also saw “core-core” inflation, which strips away the effect of fuel costs and is closely watched by the BOJ as a key gauge of demand-driven price moves, hit 1.9per cent  in fiscal 2025 and 2.1per cent  in 2026 - both unchanged from July.

The report repeated the BOJ’s view that it expects underlying inflation to converge around 2per cent  some time around late 2025 or beyond, as service prices continue to rise moderately.

The BOJ ended negative rates in March and raised short-term rates to 0.25per cent  in July on the view Japan was making progress towards sustainably achieving its 2per cent  inflation target.

Ueda has repeatedly said the BOJ will keep raising rates if the economy moves in line with its forecast. But he has also said the bank was in no rush as inflation remained moderate. Data released on Thursday showed Japan’s factory output and retail sales rose in September, suggesting the economy was on track for a moderate recovery. The ruling coalition’s loss of a majority in a weekend election has heightened concerns about policy paralysis, which could raise the hurdle for additional rate hikes, analysts say. A slim majority of economists polled by Reuters expect the BOJ to forgo a hike this year, though most expect one by March.

The Bank of Japan maintained ultra-low interest rates on Thursday and signalled the need to scrutinise global economic developments, highlighting its focus on risks to a fragile domestic recovery in deciding when to next tighten policy.

Following are excerpts from BOJ Governor Kazuo Ueda’s comments at his post-meeting news conference, which was conducted in Japanese, as translated by Reuters. “As for the timing of the next rate hike, we have not preset idea. We will scrutinise data available at the time at each policy meeting, and update our view on the economy and outlook, in deciding policy.”

“We have seen some positive US data recently. But there is still uncertainty on how past rate hikes by the Fed affect the economy and prices. We need to monitor developments carefully.

“When we used language that we can ‘afford to spend time’ gauging risks, weak US jobs data led to volatile market moves, which we saw as having a grave impact on Japan’s economy, more so than other data.

“Since then, we have seen some fairly good US data. We are still not completely confident about the US outlook, which is why we added a line in the report’s policy guidance.

“If US developments continue to improve, this risk will subside to the level of other risks.”

“When we look at the latest Tokyo CPI data, there are signs the pass-through of rising wages on services prices is broadening. We’d like to scrutinise whether such broadening will happen at the nationwide level.”

“Looking at domestic data, wages and prices are moving in line with our forecast. As for downside risks to the US and overseas economies, we’re seeing clouds clear a bit. “Risks surrounding the US economy are subsiding since summer. But there are other risks, so we are not 100per cent  sure of our baseline scenario. We can only begin to take the next step when such confidence heightens further.”

“We’ve seen companies’ price and wage-setting behaviour start to change in the past two years. It’s uncertain whether this trend will strengthen or peter. The impact of currency volatility and commodity price moves on domestic import prices is also key.”