The Bank of Japan (BoJ) refrained from expanding monetary stimulus ahead of the UK vote on Brexit next week that could roil global markets, and before a domestic election in which the political opposition has made the bank's negative interest-rate policy an issue.
With the yen soaring to its strongest in almost two years after the decision Thursday, Governor Haruhiko Kuroda reiterated in a press conference in Tokyo that the central bank won't hesitate to take action if needed. He also said the central bank was carefully monitoring moves in financial markets and was in touch with counterparts including the Bank of England, amid Brexit concerns that he said had had an impact in the bond market. Japan's bond yields slid to record lows amid demand for haven assets.The governor also reiterated his expectation for inflation to hit policy makers' 2 per cent target as forecast in the fiscal year through March 2018, saying Japan's economy continues to expand gradually and citing solid plans for business investment. Even so, he said "I'm well aware if the yen rises excessively, it could well have a big impact on inflation pace." "Speaking of the strengthening yen, we think it's not favourable that the yen rises and volatility increases without reflecting economic fundamentals," Kuroda said after the yen climbed through 104 per dollar for the first time since 2014. "We want to carefully watch and pay attention to the international financial market, including the foreign exchange." He reiterated his position that "we don't decide monetary policy based on currency moves."
The BOJ earlier held its key interest rate at minus 0.1 per cent and kept the annual target for expanding the monetary base at 80 trillion yen ($764 billion). About 28 per cent of economists in a Bloomberg survey had forecast additional easing at this meeting, with 55 per cent looking to the next gathering July 28-29, when the BOJ will update its inflation projections.
By holding off on further expansion now, Kuroda can better watch the impact of Britain's vote, see the outcome of a Japanese upper house election on July 10 and consider the path of US monetary policy. The governor declined to comment on the possibility of an unscheduled BOJ meeting ahead of the next meeting.
"The BOJ will have to take bold action to arrest the strengthening yen and if it tries something in line with what it did before, there'll be disappointment," said Takeshi Minami, chief economist at Norinchukin Research Institute. "With the Brexit vote ahead, the BOJ couldn't move this time because the result on June 23 may erase the impact of whatever it did now."
The yen has now surged more than 15 per cent this year, even with the introduction of negative rates. The Topix stocks index closed down 2.8 per cent.
If the UK votes for Brexit, the Japanese currency may gain as much as 6 yen per dollar and while the Nikkei 225 Stock Average could drop by 3,000, according to a report by Mizuho Research Institute earlier this month.
"The Bank of Japan is closely exchanging opinions with the Bank of England and other central banks and so forth," Kuroda said.
