BoJ Holds Ultra-Low Interest Rates, Raises 2022 Inflation Forecast

© Reuters.

By Ambar Warrick– The Bank of Japan (BoJ) held interest rates at record lows as expected on Friday, and said inflation is likely to rise more in the near-term as the Japanese economy struggles with elevated raw material costs  and supply chain issues.  

The central bank held its target for at negative 0.1%, and said in a statement that it will continue to guide the 10-year bond yield at 0%. 

The central bank now expects CPI inflation to end the year at 3%, higher than its previous forecast of 2.3%. But it also expects inflation to ease to around 1.5% in 2023 and 2024.

Japan’s hit an eight-year high of 3% in September, trending above the BoJ’s target 2% range for a fifth consecutive month amid rising fuel and food prices. Rising raw material prices also saw local businesses pass on the costs to customers. 

Data released earlier on Friday showed that hit a 33-year high of 3.4% in October. The figure acts as a precursor to the nationwide inflation reading for the month. 

The elevated inflation figures are expected to test the BoJ’s dovish stance, particularly its view that 2022’s inflation spike will be temporary. 

The central bank said it will continue to enact asset purchases to boost liquidity levels, citing lingering headwinds from the COVID-19 pandemic and global recession fears furthering the need for accommodative policy.

The move comes largely in line with the BoJ’s dovish stance, given that the central bank has kept short-term interest rates negative for over seven years. 

The bank is alone among its developed world peers in maintaining ultra-low interest rates. The on Thursday hiked rates sharply, while the is set to also hike rates next week as both economies struggle with elevated inflation levels. 

The BoJ’s dovish stance has severely dented the , with the currency recently hitting its weakest level in 32 years. Depreciation in the yen has also exacerbated local inflation levels.

The yen weakened slightly after the BoJ decision, falling 0.1% to 146.42 against the dollar.