BOJ maintains huge stimulus, warns of growth risks from Ukraine crisis

© Reuters. A view of signage outside the headquarters of Bank of Japan amid the coronavirus disease (COVID-19) outbreak in Tokyo, Japan, May 22, 2020.REUTERS/Kim Kyung-Hoon

By Leika Kihara

TOKYO (Reuters) – The Bank of Japan maintained its massive stimulus on Friday and warned of heightening risks to a fragile economic recovery from the Ukraine crisis, reinforcing expectations it will remain an outlier in the global shift towards tighter monetary policy.

The BOJ’s dovish tone is in stark contrast with the U.S. Federal Reserve and the Bank of England, which raised interest rates this week to stop fast-rising inflation becoming entrenched.

As widely expected, the BOJ maintained its short-term rate target at -0.1% and that for the 10-year bond yield around 0% at the two-day policy meeting that ended on Friday.

“Japan’s economy is picking up as a trend,” the BOJ said in a statement. The view was less optimistic than that of the previous meeting in January, when it said the economy was showing “clearer signs of pick-up.”

The central bank also warned of fresh risks from the Ukraine crisis, which it said was destabilising financial markets and sharply pushing up raw material costs.

“There is very high uncertainty on the impact developments in Ukraine could have on Japan’s economy and prices via markets, raw material prices and overseas economies,” the statement said.

Markets are focusing on Governor Haruhiko Kuroda’s briefing for his views on the inflation outlook and the weak yen, which is adding further upward pressure on already rising fuel costs.

“With inflation and wage growth lagging other countries, the BOJ has no choice but to patiently maintain stimulus at least until Kuroda serves out his term in April 2023,” said Hiroshi Shiraishi, senior economist at BNP Paribas (OTC:) Securities.

The world’s third-largest economy likely saw growth stall in the current quarter as supply disruptions and COVID-19 curbs hobbled output and consumption.

The BOJ downgraded its view on consumption to say a pick-up has “paused,” due to surging Omicron COVID-19 variant cases.

While inflation is seen approaching or even exceeding its 2% target in coming months, the BOJ is in no mood to withdraw stimulus as it sees the recent energy-driven price rise as a possible threat to an economy only just recovering from the coronavirus pandemic.

Earlier in the day, data showed Japan’s core consumer prices rose 0.6% year-on-year in February, marking the fastest pace in two years in a sign of growing inflationary pressure from higher energy costs.

But it is still much lower than 5.9% in the euro zone and 7.9% in the United States, where inflation is becoming entrenched as wage growth accelerates. That is not the case in Japan, where the rise in inflation is driven mostly by supply-side forces such as higher raw material costs.

Some analysts doubt whether households can stomach further price rises if wages don’t pick up much.

In a sign of the pain rising fuel costs is already inflicting on households, energy and electricity bills both shot up by around 20% in February from year-before levels, the fastest pace since 1981.

“Japan’s inflation is very moderate compared with other economies. As such, I don’t think the BOJ will move just because other central banks are doing so,” said Shotaro Kugo, economist at Daiwa Institute of Research.

Disclaimer: Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. All CFDs (stocks, indexes, futures) and Forex prices are not provided by exchanges but rather by market makers, and so prices may not be accurate and may differ from the actual market price, meaning prices are indicative and not appropriate for trading purposes. Therefore Fusion Media doesn`t bear any responsibility for any trading losses you might incur as a result of using this data.

Fusion Media or anyone involved with Fusion Media will not accept any liability for loss or damage as a result of reliance on the information including data, quotes, charts and buy/sell signals contained within this website. Please be fully informed regarding the risks and costs associated with trading the financial markets, it is one of the riskiest investment forms possible.