The Bank of Japan (BOJ) maintained its interest rates at 0-0.1 percent on Friday and expressed growing confidence in achieving its inflation target of 2 percent in the coming years. However, the lack of clear guidance on the future path of interest rate hikes has triggered concerns in the market, leading to a decline in the yen to a 34-year low past 156 against the dollar.
Moreover, the Bank of Japan also maintained its March guidance to keep buying government bonds around the current pace. This contrasted with traders’ hopes of decreasing purchases to slow the yen’s declines.
Inflation targets
Despite the market’s reaction, the Bank of Japan signaled confidence in achieving its inflation target, stating in its quarterly outlook report that trend inflation will gradually increase as wages and prices rise. In the report, the bank forecast core consumer inflation to hit 2.8 percent this fiscal year before declining to 1.9 percent in the 2025 and 2026 fiscal years. Japan’s central bank also expects core inflation, which excludes the impact of fuel costs, to reach 1.9 percent in fiscal year 2024 and 2025, before increasing to 2.1 percent in 2026.
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Market uncertainty
Japan’s central bank decision comes amidst uncertainty over the timing of the next interest rate hike, with economists divided on whether it will occur in the third quarter or beyond. Concerns over the price outlook persist, with Tokyo core inflation slipping below the 2 percent target in April, underscoring the challenges of achieving sustained price growth. On the currency’s decline, traders believe that the central bank cannot do much to reverse the decline amid interest rate and economic uncertainty.
