BoJ keeps rates steady. Cautions risks of U.S. trade disputes

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The Bank of Japan held its monetary policy meeting last week on Wednesday. As widely expected, the central bank held its monetary policy and QE unchanged.

Speaking at the press conference, the BoJ Governor Kuroda cautioned the risks of fallout from the U.S. and China trade disputes and signaled the BoJ’s willingness to take additional measures of easing if the economy deteriorated as a result.

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At the meeting, all nine members of the monetary policy committee voted  7 – 2 to keep the short-term interest rates at -0.10% while maintaining the target rate on the 10-year bonds at or near zero.

The central bank is expected to continue purchasing the government bonds to the tune of 80 trillion yen a year.

“If the trade dispute becomes more prolonged, it could begin to have an impact on the real economy as financial markets and investor sentiment become unstable,” Kuroda said in during the press conference.

He further added that “The central bank would respond with additional easing steps if repercussions from the U.S.-China trade dispute hit Japan’s economy and market.”

Kuroda said that “there would be various options, including interest rate cuts, expansion of the monetary base and additional asset purchases,” concerning the measures that the central bank would take.

However, the BoJ President said that this was not the main scenario for the central bank.

Kuroda’s warning comes as Japan’s economy enters its seventh year of expansion in November. This marks the longest increase in the history of Japan since the war. However, there are real risks that the trade disputes would weigh on growth.

Kuroda said that the impact of the trade war was so far limited and noted that the foreign exchange rates remain relatively stable despite the recent volatility in the equity markets.

The central bank chief said that the volatility in the equity markets was still not at a level where they would have a broader impact on the economy and other markets. The Japanese yen, due to its perceived status as a safe-haven is often flocked to by investors during market, economic and geopolitical turmoil.

The comments from Kuroda came as he maintained the central bank’s aggressive monetary policy and stimulus program. Interest rates were unchanged at -0.10%.

Talking about the economy, Kuroda said that the Japanese economy was on track towards reaching its 2% inflation target rate. However, the central bank had pushed back its inflation timing at its meeting earlier this year.

The BoJ released its quarterly economic outlook earlier in the day. The central bank forecasts that consumer prices would rise 0.9% in the current fiscal year ending March 2019. This was a weaker forecast compared to the 1.1% increase seen in July.

Inflation forecasts for the fiscal year ending March 2019 were cut down a notch from 1.5% to 1.4%.

The central bank forecast that the economy will advance 1.4% during the current fiscal year. This was also slightly down from the previous estimates of 1.5%. The weakness in the economic growth is expected to come as it reflects the scheduled rise in the consumption tax hike due in October 2019. Consumption tax is slated to rise from 8% to 10%. This is also expected to push inflation higher.

The Bank of Japan has been supporting the economy with its stimulus program for five years. This has created some discord among banks and other insurers as it deprives them of assets to purchase and to earn a yield.

The BoJ has been buying the ten year Japanese Government Bonds (JGB) to keep the yields near zero. Kuroda said that some of the side effects of the easing program were addressed as it introduced more flexibility to its yield curve in July.

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