BOJ keeps ultra-loose policy, dovish guidance on outlook

By Leika Kihara and Tetsushi Kajimoto

TOKYO (Reuters) -The Bank of Japan maintained ultra-low interest rates on Friday and a pledge to keep supporting the economy until inflation sustainably hits its 2% target, suggesting it was in no rush to phase out its massive stimulus programme.

Markets are focusing on comments from Governor Kazuo Ueda’s post-meeting briefing for clues on how soon the bank could phase out the massive stimulus programme of his predecessor.

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

It also left unchanged an allowance band of 50 basis point set either side of the yield target, as well as a new hard cap of 1.0% adopted in July.

“Japan’s economy is likely to continue recovering moderately,” the BOJ said in a statement announcing the decision, adding that inflation expectations have shown renewed signs of heightening.

The BOJ’s decision contrasts with those of U.S. and European central banks, which in recent meetings have signalled their resolve to keep borrowing costs high to rein in inflation.

The central bank made no change in its forward guidance, which retained a pledge to “take additional easing measures without hesitation” – language some market players thought might have changed to take on a more neutral tone.

With inflation exceeding the BOJ’s target and the yen renewing its slide, markets are focusing on any signals Ueda could drop on the timing of a policy shift.

Data released earlier on Friday showed Japan’s core inflation hit 3.1% in August, staying above the central bank’s 2% target for a 17th straight month in a sign of broadening price pressure in the world’s third-largest economy.

In a move seen by markets as a step toward an exit, the BOJ in July loosened its grip on long-term interest rates to allow them to rise more freely, a nod to increasing inflation.

Ueda told a recent interview the BOJ could have enough data by year-end to determine whether to end negative rates, heightening market expectations of a near-term policy shift.

A Reuters poll for September showed most economists predicting an end to negative interest rates in 2024. Prospects of a rate hike have helped pushed up Japan’s 10-year government bond yield to a fresh decade-high on Thursday.

The BOJ faces various challenges in exiting former governor Haruhiko Kuroda’s radical stimulus, including weak signs in the global economy and the risk of triggering a spike in yields that boost the cost of funding Japan’s huge public debt.

BOJ officials, including Ueda, have also stressed the need to keep easy policy until they are convinced that inflation will stably hit 2% driven by solid consumption and wage growth.

But some analysts see the yen, rather than wage growth or inflation, as the primary trigger for BOJ action.

Growing prospects of higher-for-longer U.S. interest rates have pushed the yen down near the 150-per-dollar level, seen as Tokyo’s line-in-the-sand for possible currency intervention.

The yen’s renewed slide has triggered fresh verbal warnings by government officials, piling pressure on the BOJ to play its part to moderate the pain from rising import costs.

(Reporting by Leika Kihara. Editing by Sam Holmes)