The Bank of Japan Maintained its Loose Setting & Trimmed the Inflation Outlook

The BoJ Kept it Loose Stance

The Bank of Japan on Tuesday decided to stick its ultra-dovish stance, since it kept rates at -0.1%, while maintaining its Quantitative and Qualitative Easing (QQE) and the yield curve control (YCC). Policymakers reiterated their commitment to "patiently" carry on with the loose monetary setting in order to achieve the 2% inflation target in a "sustainable and stable manner", together with "wage increases". ^[1]

Battling with decades of deflation and entrenched expectations that pay will not increase easily, officials are hesitant to change tack. Inflation ex fresh food has been decelerating over recent months, after the multi-decade peak around a year ago. In fact, officials raised their inflation forecasts in today's updated outlook. CPI ex-fresh food is now projected at a median of 2.4% for Fiscal 2024 (year starting in April), from 2.8% in the October forecasts ^[2]. The lower outlook raises the bar for policy normalization.

On the other hand, the Consumer Price Index (ex fresh food) has stayed above the 2% target for twenty-one consecutive months and the bank appears convinced it will achieve price stability. Underlying inflation is expected to "increase gradually" towards this goal, while the likelihood of such outcome "has continued to gradually rise".

The central bank has already taken steps towards normalization, as it had further loosened its grip on the yield curve in October and has hinted towards an eventual exit from negative rates. Markets believe that it will pivot this year, but there is less certainty around the timing. Given the importance of the wage component, it seems reasonable for policymakers to wait at least until the result of the annual spring wage negotiations.