By Leika Kihara
TOKYO (Reuters) – The Bank of Japan (BOJ) is set to maintain ultra-low interest rates on Tuesday and reassure markets it will be in no rush to withdraw stimulus, even as rising inflation prods investors to price in the chance of a policy tweak next year.
The BOJ’s decision would contrast with last week’s interest rate hikes by its U.S. and European counterparts aimed at countering persistent price pressures.
At a two-day policy meeting ending on Tuesday, the BOJ is widely expected to keep unchanged its yield curve control (YCC) targets set at -0.1% for short-term interest rates and around zero for the 10-year bond yield.
BOJ Governor Haruhiko Kuroda is also likely to stress at his post-meeting briefing the bank’s resolve to keep ultra-loose policy until inflation sustainably hits 2%, analysts say.
But with some of his fellow board members dropping hawkish hints on the policy outlook, Kuroda is set to face tough questions on the rising cost of prolonged easing and the lifespan of YCC, which was first introduced in 2016.
There is now growing uncertainty Kuroda’s reassurances can tame mounting market speculation the BOJ will tweak YCC once the dovish governor’s second, five-year term ends next April.
Markets are rife with speculation the BOJ will tweak its yield cap and allow long-term interest rates to rise more when a new central bank governor takes the helm.
The yen climbed and government bonds came under pressure on Monday after media reports the government will next year consider revising a joint statement with the BOJ that commits the bank to meeting its 2% inflation target as soon as possible.
“The BOJ was able to maintain YCC for such a long time because inflation was distant from its 2% target,” said former BOJ Deputy Governor Hirohide Yamaguchi, who is considered a candidate to become next central bank governor.
“When prices start rising, it’s very hard to maintain YCC,” he said, pointing out the chance of a hike to the 10-year yield target next year.
U.S. recession fears and slowing Chinese growth have darkened the outlook for Japan’s export-reliant economy, helping the BOJ make the case for keeping policy ultra-loose.
But with inflation exceeding the BOJ’s target for seven straight months in October, the bank’s ultra-low rates have drawn public criticism for stoking an unwelcome yen fall that has pushed up the cost of imports.
Sources have told Reuters that debate over how to remove the BOJ’s yield cap could gather pace next year, provided wages perk up and major economic risks remain contained.
(Reporting by Leika Kihara; Editing by Sam Holmes)
