Bank of Japan Leaves Interest Rates Unchanged Amid Gloomy Outlook

The Bank of Japan left its main policy unchanged after forecasting the economy will regain more lost growth than previously thought once it starts to recover from the current state of emergency.

The BOJ held its interest rate and asset buying settings intact, according to a statement from the central bank Thursday. All 44 economists surveyed by Bloomberg predicted no change in the bank’s main policy levers ahead of a policy review in March.

While the bank took a gloomier view of the current state of the economy as record cases of Covid-19 keep a state of emergency in place, the BOJ concluded that weaker growth at the end of the current fiscal year and a government stimulus package announced last month will result in a stronger rebound in the year starting April.

“The BOJ became more cautious over the current state of the economy due to the renewed emergency. But their message is you don’t have to be more pessimistic about the following years as there’s a fiscal stimulus package on tap and expectations of a vaccine rollout,” said Eiji Kitada, chief economist at Hamagin Research Institute.

Still, he added that the upgrade in the fiscal 2021 growth forecast to 3.9% from 3.6% is likely due to a rebound and shouldn’t be taken as a sign of optimism or a signal any policy tapering to come.

Ahead of the meeting, economists had taken the view that the bank would likely hold off any action until it completes a review of policy at its next gathering in March. By then the economic landscape and the trajectory for the pandemic should be much clearer.

Markets showed scant reaction to the largely in-line outcome of the meeting, with stocks and the yen little changed from levels before the decision.

Currently about 60% of the economy is subject to advisories that mainly call for reduced activity in the evenings after Prime Minister Yoshihide Suga widened the state of emergency beyond the Tokyo region to include most of Japan’s other business hubs.

The BOJ has concentrated its efforts during the pandemic on ensuring businesses have access to cash and keeping markets stable. Its relative success so far and the prospect of vaccine distribution over the coming months gave it enough breathing room to monitor developments for now.

Still, the bank’s gloomier view of the country’s immediate economic health, and its downside risks, adds to evidence the bank is a long way from the cautious optimism of some of its global peers. Some Federal Reserve officials see the possibility of a much stronger U.S. rebound once vaccines are widely delivered.

The gap in perceptions may help relieve some upward pressure on the yen. The currency hit a nine-month high against the dollar earlier this month, pushing Japanese exporters closer to loss-making levels when they are already facing lower demand amid the pandemic.

In its quarterly outlook report, the bank said the economy is picking up “as a trend.”

In the short-term, the BOJ forecast the economy will shrink 5.6% in the year through March, compared with its October forecast for a 5.5% contraction. The previous projection was already worse than the consensus among economists.

On inflation, the BOJ kept its projection that price growth is unlikely to meet the bank’s 2% target before early 2023, when Governor Haruhiko Kuroda’s current term expires.

BOJ outlook projections	New Forecast	Previous Forecast
Fiscal 2020 GDP	-5.6%	-5.5%
Fiscal 2021 GDP	3.9%	3.6%
Fiscal 2022 GDP	1.8%	1.6%
Fiscal 2020 CPI	-0.5%	-0.6%
Fiscal 2021 CPI	0.5%	0.4%
Fiscal 2022 CPI	0.7%	0.7%

Following the decision to hold policy, BOJ watchers will shift their focus to any hints Kuroda may give about a policy review in March. Kuroda has made clear he isn’t considering a major overhaul, but has flagged the buying of exchange-traded funds and the mechanics of its yield-curve management as areas needing consideration.

Kuroda is set to brief reporters at 3:30 p.m. in Tokyo.

— With assistance by Yuko Takeo, and Yoshiaki Nohara

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