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BOJ to help keep ultra-low rates, remain global outlier despite weak yen

BOJ to keep ultra-low rates, remain global outlier despite weak yen Reuters. FILE PHOTO: Exterior of Bank of Japan’s headquarter is pictured in Tokyo, Japan, June 17, 2022. REUTERS/Kim Kyung-Hoon/File Photo

By Leika Kihara

TOKYO (Reuters) -The Bank of Japan is likely to keep interest levels ultra-low on Thursday and reassure markets that it’ll continue steadily to swim against a worldwide tide of central banks tightening monetary policy to combat soaring inflation.

Such decision could lower japan currency further from 24-year lows hit in recent weeks, as investors concentrate on the widening gap between Japan’s ultra-low interest levels and the U.S. Federal Reserve’s aggressive rate hike plans.

The Fed delivered its third straight rate increase of 75 basis points on Wednesday and signalled more large hikes at its upcoming meetings, underscoring the U.S. central bank’s resolve never to let up in its battle to contain inflation.

The BOJ, in comparison, is defined to leave unchanged its -0.1% target for short-term rates, and 0% for the 10-year government bond yield under its yield curve control (YCC) policy at its two-day meeting ending on Thursday.

The hit a brand new 20-year high following the Fed’s announcement, even though U.S. currency’s gain contrary to the yen was limited as traders remained cautious with the opportunity of yen-buying intervention by Japanese authorities. The dollar last traded at 143.98 yen.

Markets are concentrating on if the BOJ would make any tweaks to its dovish guidance projecting short- and long-term interest levels to stay at “current or lower” levels, and a pledge to crank up stimulus “without hesitation” having an eye on the economic impact of the COVID-19 pandemic.

“Making big changes to the BOJ’s guidance could stoke market speculation of an early on exit from YCC, and cause big disruptions in the bond market,” said Naomi Muguruma, chief bond strategist at Mitsubishi UFJ (NYSE:) Morgan Stanley (NYSE:) Securities.

“That’s something the BOJ will most likely avoid this time around,” she said. “With other central banks hiking rates, the BOJ’s negative rate policy should come beneath the spotlight and could unleash further yen selling.”

The BOJ’s rate review would be the first one for Hajime Takata and Naoki Tamura, who joined the nine-member board in July. They succeeded former commercial banker Hitoshi Suzuki and economist Goushi Kataoka, a vocal advocate of aggressive easing who consistently voted against keeping rates steady.

A unanimous vote indicate both newcomers are unlikely to rock the boat on monetary policy for the moment.

Japan’s core consumer inflation quickened to 2.8% in August, exceeding the BOJ’s 2% target for a fifth straight month, as price pressure from recycleables and yen falls broadened.

But BOJ Governor Haruhiko Kuroda has eliminated the opportunity of a near-term withdrawal of stimulus on the view that wages have to rise more to sustainably achieve his 2% inflation target.

Kuroda’s dovish message spent some time working to weaken the yen, contradicting the government’s efforts to slow the currency’s decline through verbal threats of yen-buying intervention.

Once welcomed for the boost it offers to exports, a weak yen has developed into headache for Japanese policymakers since it pushes up the expense of importing already expensive fuel and recycleables.

The world’s third largest economy expanded an annualised 3.5% in April-June, but its recovery has been hobbled by way of a resurgence in COVID-19 infections, supply constraints and rising raw material costs.

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