Japan bucks global monetary tightening trend; yen slumps to new 24-year low

Nurluqman Suratman


SINGAPORE (ICIS)–Japan’s central bank decided on Thursday to keep its ultra-low interest rates unchanged, bucking the global monetary policy tightening trend in the fight against rising inflation, causing the yen to slump to a fresh 24-year low.

The Bank of Japan (BoJ) kept its short-term interest rate at minus 0.1% and the yield for 10-year government bonds at 0%, despite a fresh 75-basis point interest rate hike delivered by the US Federal Reserve on 21 September.

While Japan’s headline and core consumer price index (CPI) rose to around 3% in August, the “core-core” CPI which excludes both energy and fresh food prices, stood at the mid-1% level, the BoJ said.

Recent indicators have shown that Japan’s underlying inflation is below the 2% target, according to Singapore-based DBS Group Research in a note.

The BoJ has an explicit 2% inflation goal under its current policy framework.

“The BoJ currently sees the rise in headline and core CPI as a temporary phenomenon. It projects core CPI to ease to 1.4% in fiscal year 2023 from 2.3% in fiscal year 2022,” DBS added.

Japan’s central bank expects CPI on a year-on-year basis to increase further toward the end of this year due to rises in prices of such items as energy, food, and durable goods.

“Thereafter, the rate of increase is expected to decelerate because the contribution of such price rises to the CPI is likely to wane,” it said.

The Japanese yen slumped to a fresh 24-year low of 145.87 against the US dollar on Thursday, prompting a government intervention to prop it up.

“We have taken decisive action (in the exchange market),” Japan’s vice finance minister for international affairs Masato Kanda was quoted by newswire agency Reuters as saying.

At 09:45 GMT, the yen was trading at Y142.68 against the US dollar, after hitting an intra-day high of Y141.4.

The BoJ’s decision was in stark contrast to the Fed’s aggressive monetary policy tightening stance, which was firmly supporting the strong US dollar.

The Fed, issued its third 75bps rate hike this year, pushing up its key interest rates to their highest in 14 years to 3.00-3.25%.

The Japanese yen has depreciated by more than 25% against the US dollar year to date as the BOJ continues to take a dovish stance on monetary policy after going through years of deflation.

Shares of Japanese petrochemical firms settled lower on Thursday, with Asahi Kasei down 0.20% and Mitsui Chemicals down 0.49%, while the benchmark Nikkei 225 index shed 0.58% to close at 27,153.83.

Focus article by Nurluqman Suratman

Additional reporting by Pearl Bantillo

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