The Bank of Japan kept monetary policy steady on Tuesday but offered a bleaker view on the economy and warned of waning inflation expectations, signaling that global headwinds that may justify deploying yet more stimulus ahead.
Six weeks after the radical shift to negative rates, the BOJ dropped references to take rates further negative, and widened an exemption to include $90 billion in short-term funds dubbed money-reserve funds (MRFs).
As widely expected, the BOJ maintained its 80-trillion-yen ($700 billion) base money target and a 0.1 percent negative interest rate it applies to some reserves parked by financial institutions at the central bank.
“Japan’s economy continues to recover moderately as a trend, although some weaknesses are seen in exports and output on slowing growth in emerging economies,” BOJ Governor Haruhiko Kuroda told a news conference.
That was a slightly bleaker view than in January, when the BOJ said a pick-up in exports was underpinning a moderate economic recovery.
The BOJ also revised down its assessment of inflation expectations to say they were “weakening recently,” acknowledging that one of the key channels of its massive stimulus program was not working as well as hoped for.
“The BOJ is trying hard to reduce the impact that negative rates are having on the financial sector, because banks have been very critical of this policy,” said Hiroaki Muto, an economist at Tokai Tokyo Research Center.
“The downgrade of the economic assessment is a prelude to further easing,” he said, adding that he expects the BOJ will ease monetary policy again in April.
MORE TO COME?
The BOJ unexpectedly cut a benchmark interest rate below zero in January, but the move has failed to boost stock prices or arrest an unwelcome yen rise, drawing criticism from lawmakers for confusing, rather than calming, markets.
Since then, the BOJ has been in damage control with Governor Haruhiko Kuroda scrambling to find positives in the policy which is proving unpopular with the public.
In a nod to criticism over January’s decision, the BOJ removed a line from the statement announcing its policy decision that it will cut interest rates further if necessary.
The central bank also decided to offer greater exemptions from negative rates for financial institutions that use its loan programs to boost lending.
“Overall, the impression we get from the BOJ’s latest policy statement is that the central bank is already de-emphasizing negative interest rates as a policy tool, in response to its poor reception by markets and the public,” HSBC said in a research note.
Despite such concessions to banks, two of the nine BOJ board members dissented to maintaining the 0.1 percent negative rate on concern over its potential damage to the financial system.
While many BOJ policymakers are wary of expanding stimulus any time soon, some worry that Japan’s recovery may be under threat from cooling global demand and the damage that recent market turbulence is doing to business sentiment.
With the economy skirting recession and slumping energy costs weighing on prices, the BOJ is likely to cut its growth and inflation forecasts at a quarterly review in April, sources familiar with the BOJ’s thinking have told Reuters.
That would keep the BOJ under pressure to expand monetary stimulus, although the unpopularity of negative rates may mean the bank will opt to top up asset purchases rather than cut rates further, some analysts say.