The Bank of Japan held off from expanding monetary stimulus on Thursday, defying market expectations for action even as soft global demand, an unwelcome yen rise and weak consumption threatened to derail a fragile economic recovery.
The yen soared and Japanese stocks slumped as the BOJ’s inaction caught investors off guard. The dollar shed some 3 percent to fall below 109 yen, while the Nikkei share average .N225 tumbled 3.6 percent.
“The decision came as an utter surprise. I thought the BOJ would ease further today to accelerate the yen trend which had been weakening on expectations for further easing,” said Hideo Kumano, chief economist at Dai-ichi Life Research Institute.
BOJ Governor Haruhiko Kuroda defended the decision, saying that a steady improvement in the economy allows the central bank to spend some time scrutinizing the effect of its past monetary easing steps for now.
“Having said that, strong risks exist on the outlook for Japan’s economy and prices. We will scrutinize risks to the economy and prices and won’t hesitate taking additional monetary easing steps if necessary,” he told a news conference.
The BOJ decided to maintain its pledge to increase base money at an annual pace of 80 trillion yen ($732 billion) via aggressive asset purchases. It also left unchanged a 0.1 percent negative interest rate it applies to some of the excess reserves that financial institutions park at the BOJ.
In a separate move, the BOJ created a 300 billion yen loan program offering funds at zero interest to financial institutions in areas hit by this month’s earthquake in southern Japan.
IN A BIND
In a quarterly review of its projections, the BOJ cut its inflation forecasts. It also pushed back the timing for hitting its 2 percent price target by six months, saying it may not happen until March 2018 at the latest.
“I think the odds of (monetary easing) were half and half, but the most surprising point is that the markets seemed to have been surprised,” said Masashi Murata, a currency strategist at Brown Brothers Harriman.
“The most important point is that BOJ, especially Kuroda, would like to save its weapons and power for an emergency.”
The decision came in the wake of data that showed consumer prices slipping in March at the fastest pace in three years and household spending falling at the fastest pace in a year, adding pressure on the BOJ to do more to spur growth.
Kuroda has been in a bind. Many central bankers were worried about the gloomy outlook, but were also growing reluctant to use their diminishing policy ammunition.
The BOJ stunned markets in January by adding negative rates to its massive asset-buying to prevent external headwinds from threatening the achievement of its price goal.
But January’s move has failed to boost stock prices or arrest an unwelcome yen rise, keeping the BOJ under pressure to do more to revive an economy verging on recession.