© Stocksak. FILE PHOTO – A Japanese flag is displayed atop the Bank of Japan Building in Tokyo on May 23, 2012. Picture taken May 23, 2012. REUTERS/Toru Hansai
By Leika Kihara
TOKYO, Stocksak – The Bank of Japan is expected raise its inflation forecasts for Friday but maintain ultra-low rates. This is a sign of determination to support the fragile economic system even if it means that the yen will fall to new 32-year lows.
Authorities have struggled with the yen’s continual declines while investors focus on the BOJ’s ultra-low interest rate that makes it an outlier in a global wave if central banks tightening their policy to combat soaring inflation.
Japan’s core consumer inflation rate rose to 3% in September due to rising commodity prices and an increase in import costs caused by the yen’s slump. Analysts believe it will remain above the BOJ’s target of 2% for the remainder of the year.
The BOJ is expected to keep its 0.1% target for short term interest rates intact and maintain the target for the 10-year bond yield of around 0%, despite the fact that Japan’s economic recovery is still fragile and inflation being low relative to the west, at its two-day policy meeting which ends Friday.
Mari Iwashita (chief market economist at Daiwa Securities) stated that it is difficult to expect the BOJ will take monetary action to stem yen’s decline as currency policy falls under its jurisdiction.
Some market participants think the BOJ might adjust its dovish policies guidance amid growing public discontent regarding the weak-yen effects of its ultra-loose monetary policy.
Iwashita said that the Fed is determined to combat inflation and that a minor policy change by the BOJ will not narrow the gap between Japanese monetary policies and the U.S.
According to five sources familiar, the BOJ is likely to slightly revise its consumer inflation forecasts for the year ending on March 2023, according Friday’s new quarterly projections.
Sources said that the upgraded forecast will still show core consumer inflation falling below the BOJ’s target of 2% next fiscal year because the impact of one-off factors such as fuel cost increases in the past dissipate.
They said that the board will likely lower its growth forecasts in the current and subsequent fiscal years because of global recession fears.
Investors will pay close attention to Governor Haruhiko Kuroda’s post-meeting briefing. He will share his views on economic fallout from sharp declines in the yen, as well as clues on when he will end the ultra-loose monetary policy.
In July, the BOJ projected that core consumer inflation would rise to 2.3% in fiscal Year 2022 and then slow to 1.4% the next year. It projects that the economy will expand by 2.4% in fiscal 2019, and increase by 2% in fiscal 2023.