The Bank of Japan Maintained its Loose Stance & Dovish Outlook

BoJ Maintained Dovish Stance & Outlook

The Bank of Japan maintained its uber-loose stance, which includes interest rates at -0.1%, yield curve control (YCC) and quantitative and qualitative easing (QQE). It also reaffirmed its dovish outlook, saying it will "patiently continue with monetary easing" and will not hesitate to take additional action if necessary, in order to achieve the 2% inflation target "in a sustainable and stable manner". ^[1]

Earlier today, CPI ex-fresh food steadied at 3.1% y/y in August and although it has moderated from the recent four-decades peak, it has been printing above the central bank's 2% target for seventeen straight months. The BoJ itself over the summer raised the median inflation projection, to +2.5% for FY2023, from +1.8% previously.

Having been troubled by decades of deflation, policymakers struggle to create a virtuous price-wage cycle, which makes them hesitant to call it a day. They believe that "sustainable and stable achievement" of the 2% target "has not yet come in sight", requiring the continuation of monetary easing. ^[2]

Back in July the central bank took a step towards normalization by loosening its grip on the yield curve control, but that change also allows it to sustain its dovish stance. Earlier this month, Governor Ueda opened the door to an eventual exit from negative rates, saying that officials could have enough data to make that determination by the end of the year. This marked a hawkish shift in rhetoric, but no imminent action was indicated.

The BoJ's loose monetary setting places it on the opposite side of it major counterparts, especially the US Fed, which has been a great source of strength for USD/JPY. The Fed delivered a hawkish hold on Wednesday, keeping another hike on the table and pointing to a tighter 2024 policy path than previously expected. The latest round of decisions sustains the favorable monetary policy differential.