Kavan Choksi: The BOJ on Inflation Clouding over Japan’s Recovery

The BOJ's steadfast adherence to its zero-rate policy is at odds with global central banks tightening monetary policy, informs Kavan Choksi. As a result, inflation in Japan is likely to creep toward the central bank's 2% target.

The yen has dropped to two-decade lows versus the dollar, widening the interest rate differential between the US and Japan. Some politicians fear that additional yen depreciation could harm the economy by raising import costs. However, with inflation low relative to other countries and the economy still weak, the BOJ is unlikely to raise borrowing costs or change its commitment to hold rates at current or lower levels, according to sources familiar with the bank's thinking.

Last month, BOJ Governor Haruhiko Kuroda said, "The output gap in Japan is negative, and there is still a long way to attain the 2 percent target stably."

"In the current situation, the bank's job is crystal clear: maintaining the existing monetary easing centered on yield curve control." Kavan Choksi expected the BOJ to keep its short-term rate target at -0.1 percent and its 10-year bond yield objective at about 0 percent at a two-day policy meeting last month.

Kavan Choksi anticipates that the central bank will lift its inflation projection for this fiscal year to roughly 2% due to factors such as rising gasoline costs. However, Kavan Choksi expects the BOJ to lower its growth forecast due to weaker consumer demand. The BOJ says it "won't hesitate to take additional easing moves" and expects short- and long-term policy rates to "stay at their current or lower levels" under current guidelines.

Kuroda stated that he doesn't see the need to increase stimulus spending and that future policy will be data-driven and agile. Additionally, analysts believe that any adjustment in the guidelines will be minor and shouldn't result in quick monetary tightening.

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