Unfazed by yen’s slump, BOJ seen keeping ultra-low rates

By Leika Kihara

TOKYO (Reuters) – The Bank of Japan is expected to raise its inflation forecasts on Friday but keep ultra-low interest rates steady in a show of resolve to support the fragile economy, even at the cost of accelerating an unwelcome fall in the yen to fresh 32-year lows.

Authorities have struggled to tame the yen’s relentless declines as investors focus on the BOJ’s ultra-low interest rates that make it an outlier among a global wave of central banks tightening policy to combat soaring inflation.

Given rising commodity prices and the boost to import costs from the yen’s slump, Japan’s core consumer inflation rate hit an eight-year high of 3% in September and is seen staying above the BOJ’s 2% target for the rest of this year, analysts say.

But with inflation modest compared with western nations and Japan’s economic recovery still fragile, the BOJ is set to leave intact its minus 0.1% target for short-term interest rates and the target for the 10-year bond yield at around 0% at its two-day policy meeting that ends on Friday.

“It’s hard to expect the BOJ to take monetary action to stem the yen’s fall as currency policy falls under the jurisdiction of the finance ministry,” said Mari Iwashita, chief market economist at Daiwa Securities.

Some market participants speculate the BOJ could tweak its dovish policy guidance amid growing public discontent over the weak-yen effect of its ultra-loose monetary policy.

“With the Fed determined to combat inflation, a minor policy tweak by the BOJ will do little to narrow the gap between U.S. and Japanese monetary policy,” said Iwashita.

In fresh quarterly projections due on Friday, the BOJ is expected to slightly revise up its consumer inflation forecasts for the year ending in March 2023 and the following year, said five sources familiar with the bank’s thinking.

The upgraded forecast will still show core consumer inflation sliding below the BOJ’s 2% target next fiscal year as the impact of one-off factors, such as past rises in fuel costs, dissipate, the sources said.

The board will likely cut its growth forecasts for the current and following fiscal years, as global recession fears cloud the outlook for the export-reliant economy, they said.

Investors’ attention will be focused on Governor Haruhiko Kuroda’s post-meeting briefing for his views on the economic fallout from the yen’s sharp declines, and clues on the timing of an eventual exit from the ultra-loose policy.

In July, the BOJ forecast core consumer inflation to hit 2.3% in fiscal year 2022 before slowing to 1.4% the following year. It projects the economy to expand 2.4% in the current fiscal year and rise 2% in fiscal 2023.