By Leika Kihara and Daniel Leussink
TOKYO (Reuters) – The Bank of Japan kept monetary policy steady on Thursday but signaled the chance of expanding stimulus as early as its next policy meeting in October by issuing a stronger warning against overseas risks threatening the export-reliant economy.
BOJ Governor Haruhiko Kuroda said the central bank has edged closer toward loosening policy than when its board last met in July, as the U.S.-China trade war and slowing overseas demand dampen prospects for achieving its elusive 2% inflation target.
“We are more eager to act given heightening global risks. We will scrutinise economic and price developments thoroughly at next month’s meeting to decide whether to ease,” Kuroda told a news conference after the policy announcement.
As expected, the BOJ maintained its short-term interest rate target at -0.1% and a pledge to guide 10-year government bond yields around 0% under its yield curve control (YCC) policy.
Signaling growing alarm over heightening risks, the BOJ added a phrase in its statement that it was becoming necessary to pay “closer attention” to the chance the economy could lose momentum to achieve the BOJ’s price target.
“Taking this situation into account, the BOJ will re-examine economic and price developments at its next policy meeting” when it reviews its long-term growth and price forecasts, it said.
Kuroda said the phrase was intended to emphasise the BOJ’s growing concern over heightening overseas risks, and its readiness to act quickly to keep the economy from deteriorating.
But some analysts doubt whether the BOJ could ease soon given a lack of policy ammunition and the rising cost of massive stimulus, such as the pain that years of ultra-low rates is inflicting on financial institutions’ profits.
“I don’t think the BOJ meant to pre-commit to ease policy next month. Rather, it wants to buy time and avoid easing as long as markets remain calm,” said Hiroshi Shiraishi, senior economist at BNP Paribas (PA:).
“But some market players are pricing in further easing so if the BOJ stands pat, that may cause a market reaction such as a renewed rise in the yen,” he said.
The yen rallied on Thursday after the BOJ’s decision to keep rates on hold, reflecting the market’s disappointment that it did not follow other central banks in easing policy.
DEEPER NEGATIVE RATES AN OPTION
The BOJ’s announcement came hours after the U.S. Federal Reserve cut interest rates to sustain a record-long economic expansion and insure against risks.
The BOJ next meets for a rate review on Oct. 30-31, when it will conduct a quarterly review of its long-term growth and inflation forecasts.
Market expectations of imminent easing grew after the BOJ pledged in July to act “without hesitation” and preemptively to fend off risks that could knock the economy off the path toward achieving its elusive 2% inflation target.
Kuroda said cutting rates further into negative territory will be among options if the BOJ were to ease, as well as other steps that can be taken under the current framework such as increasing asset purchases.
“I don’t think we need to overhaul our yield curve control framework. If we were to act, we will aim at lowering real interest rates and narrowing risk premia,” Kuroda said, adding that what specific steps it will take will depend on prevailing economic conditions.
The BOJ is in a bind, with few tools left to battle the next recession with interest rates already near zero. Recent falls in overseas long-term interest rates have pushed down super-long yields in Japan, flattening the yield curve and further crushing financial institutions’ margin.
“It’s desirable for the yield curve to be steeper,” Kuroda said. “We won’t allow yields to slide too far below our target, and take appropriate market operation steps as needed.”