Summary:
- Bank of Japan keeps monetary policy settings unchanged
- Some voices to strengthen monetary easing by lowering short-term interest rates
- Possible action might take place next month
Several hours after the Federal Reserve delivered its second rate reduction (within its mid-cycle adjustments), the Bank of Japan decided to hold all its monetary policy settings unchanged. It means that the policy rate is still -0.1%, the central bank still targets the 10Y bond yield to be at around 0% and it promises to continue purchasing assets within its QQE at the same pace. What could draw markets’ attention is a suggestion the BoJ will re-examine of prices and the economy at its October (30) meeting. It is worth noting that the last such a re-examination led to the creation of the current policy framework in conjunction with the yield curve control mechanism. On top of that, the BoJ strengthened its dovish pledged by underlining a need to pay closer attention to the risk of losing momentum toward its 2% inflation target.
One member, Kataoka, suggested a possibility to strengthen monetary easing by lowering short-term interest rates citing reduced chance for higher price growth in the foreseeable future. Let us recall that there have been some doubts over efficiency of further rates cuts (as those cuts may come with some unintended consequences) in Japan given the main rate is already negative. In our view, the BoJ may want to address any adverse effects on the economy coming from a 2% sales tax increase coming into effect on October 1, therefore one cannot rule out more easing next month which would bring a chance in the USDJPY once the Fed stops lowering rates as suggested in the dot-plot.
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The BoJ mulls over further action for all the inflated balance sheet already exceeding the size of the economy. Source: Bloomberg
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