The Bank of Japan (BOJ) kept monetary policy steady on Thursday and slightly upgraded its view on the economy, suggesting that no immediate expansion of stimulus was needed to combat the coronavirus pandemic.

Markets are focusing on what BOJ Governor Haruhiko Kuroda said at his post-meeting briefing on how the central bank could work with new Prime Minister Yoshihide Suga to support the economy with its dwindling policy tool-kit.

As widely expected, the BOJ maintained its -0.1% short-term interest rate target and a pledge to cap 10-year government bond yields around zero.

It also made no major tweaks to its asset-buying and lending programmes for easing corporate funding strains.

“Japan’s economy remains in a severe state but has started to pick up as business activity gradually resumes,” the BOJ said in a statement announcing its policy decision.

That was slightly more upbeat than its view at the previous rate review in July, when it said the economy was an “extremely severe state.”

Suga became Japan’s first new prime minister in nearly eight years on Wednesday, pledging to contain COVID-19 and push reforms after retaining about half of predecessor Shinzo Abe’s lineup in his cabinet. Analysts expect no major change to the relationship between the BOJ and an administration led by Suga who, as Abe’s right-hand man, spearheaded the departing premier’s strategy to revive the economy with bold monetary and fiscal measures.

“I’m interested to see what Kuroda may say about the BOJ’s relationship with the new administration,” said Masaki Kuwahara, senior economist at Nomura Securities.

“Probably Kuroda will play it safe and reiterate that it will continue easing, which as a result will have positive effects on policy mix between monetary and fiscal policies.”

Japan suffered its biggest economic slump on record in the second quarter as COVID-19 hit demand, reinforcing expectations inflation will remain well below the BOJ’s 2% target for years.

The BOJ eased policy twice this year, mainly by ramping up asset buying and creating a lending scheme to channel money to ailing small firms to cushion the blow from the crisis.

The Bank of Japan will monitor not just inflation trends but job growth in guiding policy, Haruhiko Kuroda said, signalling the BOJ’s readiness to ramp up stimulus if job losses from the coronavirus crisis heighten the risk of deflation.

With the immediate hit from the pandemic easing, the central bank kept monetary policy steady earlier on Thursday and upgraded its view on the economy to say it was starting to pick up.

But Kuroda said the BOJ would work closely with new Prime Minister Yoshihide Suga’s administration to shield the economy from the pandemic’s pain including by loosening policy further.

The remark echoes that of Suga, who was officially elected prime minister on Wednesday, that protecting jobs was a top priority of his administration.

“Our foremost target is our inflation goal. But we obviously are also striving to achieve healthy economic growth, including job conditions,” Kuroda told a news conference.

“Just because inflation isn’t moving much, that does not mean we will not deploy additional monetary steps. We will of course consider additional easing steps if factors, such as jobs and demand, affect price moves negatively,” he said.

Kuroda’s remarks also come after the US Federal Reserve’s recent pledge to do more to create jobs and its commitment on Wednesday to keep interest rates near zero until inflation is on track to overshoot its 2% target.

“What’s worrying the BOJ most must be the prospects of a prolonged easing by the Fed, which will exert downward pressure on the dollar, causing the yen to rise,” said Masaki Kuwahara, senior economist at Nomura Securities.

“Given the bleak economic situation, further easing may be needed, but the BOJ has pretty much exhausted its policy tools.”

As widely expected, the BOJ maintained its -0.1% short-term interest rate target and a pledge to cap 10-year bond yields around zero. It also made no major tweaks to its asset-buying and lending schemes for easing corporate funding strains.

“Japan’s economy remains in a severe state but has started to pick up as business activity gradually resumes,” the BOJ said. That was slightly more upbeat than its view in July, when it said the economy was an “extremely severe state.”

Japan suffered its biggest economic slump on record in the second quarter as COVID-19 hit demand, reinforcing expectations inflation will remain well below the BOJ’s 2% target for years.

Reuters