The Bank of Japan hopes for a virtuous cycle

The Bank of Japan (BoJ) unanimously decided to

leave its policy settings unchanged. The policy rate

was left at -0.1% and the target for 10-year bond yields

was maintained at 0% with an upper bound of 1%.

The BoJ also extended by one year the deadline for

loan disbursement under the Fund-Provisioning

Measure to Stimulate Bank Lending.

The near-term forecasts for inflation were lowered a

touch to reflect the recent decline. We continue to think

inflation will fall further over the next few quarters as

pressures from past import inflation abate.

However, the BoJ’s fiscal year 2025 inflation forecast

was nudged up to 1.8%, and the wording around

service price expectations was strengthened to reflect

the potential for a virtuous cycle between wages and

prices.

The usual mix of caution and optimism was evident

throughout the statement, forecasts and press

conference. On the one hand, Governor Ueda believes

that the likelihood of hitting the inflation target over the

medium term continues to rise. On the other hand,

even as the price goal looks to be in sight, the BoJ will

maintain an easy stance.

We continue to expect that yield curve control (YCC)

and negative interest rate policy (NIRP) will be

removed later this year, after the BoJ has confirmed a

strong Shunto wage round. Timing the precise meeting

for any policy change is difficult, but, on balance, we

expect a move by July.

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