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The Bank of Japan Continues its Ultra-easy Monetary Policy

Because of “Extremely High Uncertainties,” the Bank of Japan Continues its Ultra-easy Monetary Policy

The Bank of Japan (BOJ) has chosen to maintain its ultra-loose monetary policy at its final policy meeting of the year due to “extremely high uncertainties” affecting Japan’s economy. The central bank unanimously decided to keep interest rates at -0.1% and maintained its yield curve control policy, limiting the upper limit for the 10-year Japanese government bond yield to 1%. The BOJ expressed its commitment to continuing monetary easing while remaining responsive to economic developments, pricing, and financial conditions.

The decision comes amid challenges to unwinding the ultra-loose monetary policy, with a slowing economy and cooling inflation posing obstacles. Most economists anticipate potential changes to be made by Governor Kazuo Ueda next year, particularly after annual spring wage negotiations confirm a trend of meaningful wage increases. Ueda is expected to provide further guidance on the BOJ’s future actions during a press conference in Tokyo.

Earlier in December, comments from Ueda had led to expectations of a policy change, prompting a rally in the yen. However, the BOJ remains cautious about unwinding its long-held ultra-loose monetary policy, fearing that premature moves could jeopardize recent improvements.

Regarding inflation outlook, the BOJ stated on Friday that it expects core inflation (excluding food prices) to remain above 2% through fiscal 2024. Despite core inflation surpassing the 2% target for 19 consecutive months, the BOJ continues with its accommodative monetary policy. The central bank prefers inflation driven by domestic demand, believing that wage increases would lead to sustainable consumer spending.

Japan’s umbrella labor union, Rengo, has demanded at least a 5% wage hike in next year’s spring negotiations, following a successful negotiation for the largest raise in three decades earlier this year.

The BOJ’s monetary policy remains complex and multi-faceted, employing various quantitative easing tools over the past three decades to reflate Japan’s economy. The central bank’s super-easy stance stands in contrast to other major central banks that have raised rates to combat persistent inflation, contributing to pressures on the Japanese yen and government bonds.