Bank of Japan Sticks to Ultra-Loose Stance, Dashing Hopes for Normalization

BoJ Stayed Dovish

In stark contrast with its major counterparts, the Bank of Japan has been implementing an accommodative strategy, with qualitative and quantitative easing, sub-zero rates and a cap on yields. With inflation (ex fresh-food) above its 2% target for the past nineteen straight months, it has been taking steps toward normalization. It had further loosened its grip the yield curve in late-October, by treating the 1% upper limit on the 10-year yield a reference point instead of a hard ceiling.

These incremental tweaks however, also allow it to prolong its ultra-loose policy. Officials did just that at today's meeting, maintaining the current setting and their dovish outlook. They once again pledged to "patiently" continue with monetary easing until they achieve the 2% inflation goal in a "sustainable and stable manner" and warned they won't hesitate to take of additional measures if needed.^[1]

Although the Consumer Price Index has been elevated, this has largely been a product of high import prices. Having grappled with decades of deflation, policymakers are in no hurry to change tack and want to see domestic demand and higher incomes, in order to create a virtuous wage-price cycle. Furthermore, the recent GDP data don't help towards tightening. The Japanese economy contracted by 2.9% in Q3, which was the worst print in more than three years.

Today's decision dashed market hopes that the central bank would at least tweak its language to signal a upcoming shift in strategy. The BoJ has hinted towards an eventual normalization, but there is uncertainty around the timing and the options, which include rate hikes, new changes to the yield curve (cap, targeted JGB etc) or its abandonment.