The Bank of Japan maintains its ultra-easy monetary policy and expects to achieve a 2% inflation target.

• The BOJ kept interest rates at -0.1% and maintained its yield curve control policy, which sets the upper limit for 10-year Japanese government bond yield at 1%, as stated in a policy statement released on Tuesday following a two-day meeting.
• The BOJ board members revised their median growth forecast for core consumer price, which excludes food prices, to 2.4% for the fiscal year 2024, starting from April, down from the previously estimated 2.8% in October.
• The BOJ is expected to end its negative rates regime at its April meeting if the spring wage negotiations indicate a significant increase in wages.

The Bank of Japan announced on Tuesday that the chances of the world's third-largest economy achieving the 2% inflation target were becoming more optimistic, following the central bank's decision to maintain its ultra-loose monetary policy during its first meeting of the year.

The BOJ kept interest rates at -0.1% and maintained its yield curve control policy, which sets the upper limit for 10-year Japanese government bond yield at 1%, according to a policy statement released after a two-day meeting. This was in line with the expectations of economists polled by Reuters.

Governor Kazuo Ueda stated in a Tokyo press conference that the economy is moving in accordance with our inflation projections, as reported by Reuters.

Our core-core inflation forecast is currently at 1.9%, which is very close to our 2% target. This has been the case in both October and this time, after a thorough examination.

The Bank of Japan distinguishes between "core-core inflation," which excludes both food and energy price growth, and "core inflation," which only excludes food price increases.

Ueda stated that the biggest factor that increased our confidence in achieving our price target sustainably is gradually increasing, but it is difficult to determine how close we have come.

The Japanese yen strengthened by 0.7% to 147.4 yen against the dollar, while the Nikkei 225 equity benchmark finished 0.1% lower after briefly reaching a new three-decade high. Yields on the 10- and 30-year JGBs increased slightly, while those on shorter-term bonds decreased slightly.

Inflation outlook

The BOJ board members reduced their forecast for core consumer prices growth in fiscal 2024 to 2.4% from 2.8% in October, as a result of decreasing oil prices.

The central bank slightly raised its forecast for core CPI inflation in fiscal 2025 from 1.7% to 1.8%, while the BOJ maintained its previous forecasts for core core inflation at 1.9% for both fiscal 2024 and 2025.

The BOJ expects gradual increases in underlying CPI inflation as the output gap turns positive and medium- and long-term inflation expectations and wage growth rise, although there remain high uncertainties over future developments.

Despite the core CPI in Japan slowing to 2.3% in December, the BOJ remains under pressure to normalize its policy as this print has been above the BOJ's target of 2% for 21 consecutive months.

Ueda stated that the recent increase in service prices is due to several one-time factors, and the decline in consumption is also affecting service prices. As a result, they are attempting to analyze the trend while removing these factors.

He stated that although we believe service inflation is gradually increasing as a trend, the future focus will be on whether wage increases will lead to an increase in prices, specifically service prices.

Wage growth

The BOJ is expected to normalize its rates during its April meeting if the spring wage negotiations indicate a significant increase in wages.

The central bank of Japan believes that this trend will motivate consumers to spend, resulting in a more stable and sustainable inflation rate driven by domestic demand.

Ueda stated that waiting for the outcome of all firms' wage negotiations, including smaller firms, would take a long time. Even without wage data, we can predict the outcome of smaller firms' wage outlook by analyzing various economic moves.

In October, Japan's labor union Rengo announced that it would push for wage increases of at least 5% during the spring wage negotiations. The union was successful in securing the largest raise in three decades at the previous year's talks in March.

Ueda stated that if real wages remain negative for an extended period, it will be challenging to achieve our price target. However, if we anticipate real wages turning positive, the current negative wages won't hinder us from normalizing monetary policy.