BOJ would hold fire as inflation surges, Yen weakened

The Bank of Japan is expected to keep fiscal policy settings steady on Thursday and to contain inflation to stay below its 2% target for at least two more years.

The BoJ is widely expected to leave its stimulus unchanged amid further delay in the economic recovery from the pandemic, only days before Prime Minister Fumio Kishida faces his first national election.

48 out of 49 economists polled by Bloomberg do expect the Bank of Japan to decide no interest rate hike nor issue decisions on asset purchase plans at the end of its meeting.

The Japanese central bank is also expected to lower its forecast for economic growth in the current fiscal year, while raising expectations for next year.

Noting the setbacks of Japan’s recovery, the BoJ could adjust the economy’s rank or even effect a significant cut of its assessment, as it previously did in January.

On the longer term, the central bank is likely to maintain the fundamental view that the gradual recovery will continue even after delays caused by the coronavirus waves in summer months and supply shortages.

However, BoJ Governor Haruhiko Kuroda is likely to emphasize the need to keep monetary stimulus intact, unlike in other economies. Rising commodity costs have pushed Japan’s wholesale inflation to a 13-year high in September. But the pass-through to households has been remarkably slow due to sluggish domestic demand, keeping consumer inflation stuck around zero.

Downward pressure will remain on the Japan’s yen, which fell last week to its lowest level in four years against the dollar, amid expectations that the Federal Reserve will announce a decline in the stimulus plan next week.

Surveys suggest the ruling party’s majority is at risk in Sunday’s general election, although the ruling coalition is likely to stay in power.

It is noteworthy that the poor economic performance may increase pressure on Kishida to increase the size of the spending package he has pledged, but analysts do not see a scenario in which he pressures the central bank to change track.

The BoJ usually releases its policy statement and forecasts at noon with Kuroda expected to brief media after the policy meeting at 3:30 p.m.

BOJ may revise its inflation forecasts downward to account for special factors, such as the change in the base year of the CPI series. But it will be important to see how the BoJ assesses inflation expectations – as that would give a better reading of its policy status.

In fresh quarterly estimates, the BOJ is set to slash its consumer inflation forecast for the year ending in March 2022 from the current 0.6%.

Analysts expect no major change to the BOJ’s consumer inflation projection of 0.9% for fiscal year 2022 and 1.0% for the following year, which would confirm price growth will stay well below the central bank’s elusive 2% target.

Manufacturers are focusing on whether Haruhiko Kuroda will issue any warning against the yen’s recent weakness, which boosts exporters’ earnings but drives up already high import costs for retailers still reeling from the pandemic’s impact.