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The Bank of Japan (BoJ) elected to maintain its negative interest rates on Wednesday as expected, although lowering its inflation expectations for 2019. The BoJ is holding short-term interest at -0.1% in a vote that was seven for, two against.

Key Takeaways

• The BoJ chose to maintain its 0.1% short-term interest rates and confirmed its government bond-buying scheme.
• The central bank will buy Japanese government bonds to maintain yield on the 10-year note at approximately 0%.
• The bank forecast its core inflation gauge from 1.5 – 1.7% to 1 – 1.3%.

The forecast for consumer prices excluding the volatile component of fresh food is known as the core inflation gauge – the forecast core inflation has dropped significantly from the prediction made only in October which outlined a range of 1.5 – 1.7%, now at 1 – 1.3%.

The overall target inflation is 2%. The bank has adopted the bond buying scheme and the controversial negative interest rate policy in an ambitious attempt to reverse many decades of inflation and meet the target in the face of high sales tax, trade protectionism, falling oil prices, and the rising cost of social security in Japan’s increasingly elderly society.

The measures have drawn concerns from critics who note that the policy is essentially the opposite of that put in place by other national central banks such as the US federal reserve which implemented four rate hikes last year.

Fire is hot, water is wet and the Bank of Japan is lowering its inflation forecast https://t.co/BbAc955vso via @WSJ

— Mike Bird (@Birdyword) January 23, 2019

Expert Outlook

The bank stated that “the rate of change in the consumer price index has been positive but continued to show relatively weak developments compared to the economic expansion and the labour market tightening.”

Marcel Thielant, senior Japan economist for Capital Economics, stated that Japan raising the interest rates would signify concerns ove the impact of monetary easing on the health of financial institutions. He referred to the revised inflation prediction as a sharp change but expected policy to hold firm beyond next year.

BoJ governor Haruhiko Kuroda confirmed this outlook in a press conference held today, stating "Our inflation outlook has not changed very much” and that the bank is still on target for 2% inflation long-term. On the other hand, a Reuters poll reported increased chances of an upcoming recession this April in Japan which would hamper the inflation initiative.

He also commented on the effects of the ongoing trade war between Washington and Beijing, saying "To be honest, if US-China trade tensions are drawn out, there will be a serious risk to the global economy — first to the two countries’ own economies. For now, that possibility is slim, and I hope they will resolve this soon.”

"It will be difficult for the BOJ to discuss policy normalization or an exit strategy for the moment as risks from global economies are rising," said Hiroaki Mutou, chief economist at Tokai Tokyo Research Institute.

"The central bank will likely save easing measures for later and it will examine how the Fed policy movement will be and how it will likely impact the yen," he said.

Market Reaction

The Japanese yen lost value against the US dollar following the report, with little reaction seen in the gold market. Spot gold is trading at $1,282.58/oz and up 0.10% with a high of $1,286.51/oz and a low of $1,278.89/oz.

As a major Asian economy with a controversial monetary policy in times of global economic turbulence, the health of the Japanese economy is likely to impact that of other Asian economies and have a ripple effect into the global economy as well.