Bank of Japan holds rates, damps down speculations of rate hike in near term

Haruhiko Kuroda, Bank of Japan (BoJ) chief, has damped down speculation that the central bank is preparing the ground for raising interest rates next year amid a global wave of policy tightening by central banks led by the Federal Reserve.

The BoJ kept its monetary policy in place Thursday as inflation remains stubbornly low in the world’s third-biggest economy, bucking a trend of gradually tighter policy in major economies.

At its meeting, the BoJ kept its target for 10-year Japanese government bond yields at around zero and its short-term deposit rate at minus 0.1 percent. The bank also maintained a pledge to buy government bonds at an annual rate of ¥80 trillion yen ($705 billion), a passage seen by investors as a symbolic gauge of its commitment to easing.

It would also keep charging a negative interest rate on some accounts held by financial institutions at the central bank in a bid to prompt lending by commercial banks.

Kuroda said that consumer prices were the key element in the bank’s decisions on interest rates, implying that no near-term changes were planned. He added that pressure on commercial banks stemming from central-bank policies had been addressed.

He, however, left the door open to the possibility of higher rates before the central bank reaches its 2 percent inflation target, and even further easing if prices slump.

“The BOJ is going to maintain current monetary settings as long as the price momentum remains unchanged,” Kuroda said at a news conference after repeated questions over whether the bank was considering raising rates. “That doesn’t mean the BOJ wouldn’t change the yield target if inflation came close to hitting 2 percent,” he said.

Japan’s core consumer-price index rose 0.8 percent on year in October—the fastest on-year rise in 2½ years but still far from the bank’s target.

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Kuroda also gave few clues about any timeline for pulling back the bank’s huge asset-buying programme.

“We won’t raise interest rates just because our economy is doing well … We’ll consider further easing if there’s a risk that the momentum (towards achieving the two-percent inflation target) isn’t maintained,” he told reporters.

Investors were also watching out for possible indications on whether Kuroda will stay on as he nears the end of his five-year term.

The governor’s comments may go some way to decrease expectations of possible rate increases next year, though economists are also wary of dropping their guard against a potential policy change in the works.

“The BOJ could raise rates if inflation reaches halfway to its 2% target, giving it confidence that it will reach the goal,” said Takuji Aida, chief economist at Société Générale in Japan. But he added that the bank would also need to feel comfortable about the balance of risks ahead and an exchange rate of around ¥120 against the dollar to reach a launching point for higher rates.

The decision came little more than a week after the Fed raised U.S. rates for the third time this year as it leads a global shift in central banking toward tighter policy.