Bank of Japan keeps interest rate unchanged at -0.1% as expected

The Bank of Japan (BoJ) board members decided to make no changes to their current policy settings, following its January monetary policy review meeting on Tuesday.

The Japanese central bank held the interest rate and 10-year JGB yield target steady at -10bps and 0% respectively. The BoJ maintains its yield curve control (YCC) policy of allowing 10-year government bond yields to move up to around 1.0%.

The BoJ left the forward guidance on monetary policy unchanged.

BOJ quarterly report

“Risks to economic activity generally balanced.”

“Need to closely monitor whether virtuous cycle between wages and prices will intensify.”

“Will continue with QQE with YCC as long as needed.”

“Won't hesitate to take additional easing steps if needed.”

“BoJ will patiently continue with monetary easing while nimbly responding to developments.”

“Japan's financial system has maintained stability on the whole.”

“Uncertainty remains but likelihood of achieving sustained 2% inflation continues to gradually heighten.”

“Japan's economy likely to continue recovering moderately.”

“Must be vigilant to financial, fx market moves and their impact on japan's economy, prices.”

“Inflation expectations gradually heightening.”

“Core consumer inflation moving below 2.5%, partly reflecting moderate rise in service prices.”

“Consumption continues to rise moderately.”

Market reaction to the BoJ policy announcements

USD/JPY attracts some buyers following the BoJ’s policy announcements. The pair is currently trading at 148.37, up 0.22% on the day.

USD/JPY: 15-minutes chart

Japanese Yen price in the last 7 days

The table below shows the percentage change of Japanese Yen (JPY) against listed major currencies in the last 7 days. Japanese Yen was the weakest against the Pound Sterling.

	USD	EUR	GBP	CAD	AUD	JPY	NZD	CHF
USD		0.48%	-0.08%	0.25%	0.86%	1.64%	1.55%	1.29%
EUR	-0.49%		-0.56%	-0.23%	0.37%	1.16%	1.07%	0.83%
GBP	0.08%	0.55%		0.31%	0.93%	1.71%	1.62%	1.36%
CAD	-0.25%	0.23%	-0.32%		0.61%	1.40%	1.31%	1.05%
AUD	-0.86%	-0.38%	-0.93%	-0.62%		0.79%	0.70%	0.44%
JPY	-1.68%	-1.19%	-1.75%	-1.43%	-0.83%		-0.09%	-0.37%
NZD	-1.59%	-1.09%	-1.64%	-1.34%	-0.71%	0.08%		-0.27%
CHF	-1.31%	-0.83%	-1.38%	-1.06%	-0.44%	0.36%	0.27%

The heat map shows percentage changes of major currencies against each other. The base currency is picked from the left column, while the quote currency is picked from the top row. For example, if you pick the Euro from the left column and move along the horizontal line to the Japanese Yen, the percentage change displayed in the box will represent EUR (base)/JPY (quote).

This section below was published as a preview of the Bank of Japan Interest Rate Decision at 23:00 GMT.

The Bank of Japan is likely to maintain the YCC and rates unchanged.
BoJ’s Governor Kazuo Ueda is unlikely to signal a pivot timeline.
USD/JPY has room to retest the multi-year high at 151.94.

The Bank of Japan (BoJ) will announce its monetary policy decision first thing Tuesday. As usual, the central bank is widely anticipated to maintain its interest rates unchanged with the main benchmark to remain steady at -0.1%, despite inflation in Japan has been above the central bank’s 2% target for almost two years. Additionally, policymakers will likely maintain the Yield Curve Control (YCC) untouched, which currently allows the 10-year Japanese Government Bond (JGB) yield to rise to around 1.0%.

Bank of Japan Interest Rate Decision: What to know in markets ahead of the announcement

The Japanese Yen (JPY) has been on the back foot since March 2022, with the USD/JPY pair soaring to a multi-year high of 151.94 in October 2022. The JPY recovered throughout November and December, when the BoJ tightened the monetary policy “de facto” by increasing its tolerance on long-term yields. Back then, speculative interest believed Japanese authorities were at the first stages of dropping the ultra-loose monetary policy. Yet as 2023 went by, the pair resumed its advance as Governor Kazuo Ueda gave no signs of pivoting. Heading into the decision, the pair trades at around 148.00.

Meanwhile, the Japanese core Consumer Price Index (CPI) rose 2.3% in December 2023, slowing from 2.5% in November and posting the lowest reading since June 2022. The figures further undermined the odds of a shift in the current monetary policy, furthermore considering policymakers refrained from acting when CPI pressures were much higher.

Another factor contributing to the central bank’s decision is wage growth. Wage growth is a critical part of price pressures, as salary increases usually trigger inflationary concerns. In fact, the lack of wage growth partially explains Japanese stagnation and the decision to adopt an ultra-loose monetary policy back in 2016.

Through most of 2023, Japan experienced the fastest wage growth in decades, spurring confidence over a potential monetary policy shift. However, inflation-adjusted real wages fell 3% YoY in November, accelerating the slump after losing 2.3% in October. All in all, the BoJ has no reason to change its monetary policy path, moreover considering policymakers have remarked that higher wages are a prerequisite for moving away from monetary stimulus.

When will the BoJ announce its interest rate decision, and how could it affect USD/JPY?

As said, the Bank of Japan is unlikely to change the ongoing policy. The central bank will likely maintain the main rate benchmark at -0.1% and the YCC at its flexible current levels. Even though the central bank is inclined to make announcements by surprise, the chance of an unexpected statement this time is pretty much null.

Market participants will be looking for Governor Kazuo Ueda's words, although he has cooled down his tone ever since taking office. Ueda pledged for a “quiet exit” in mid-2023 and is clearly on such a path, with no rush to introduce changes.

On a positive note, Governor Ueda said that prices and wages appeared to be moving in the right direction in December, although he added that conditions remained uncertain. Uncertainty has likely increased after Japan was hit by a heartquake at the beginning of the year, prompting policymakers to retain the wait-and-see stance.

The JPY will react accordingly to BoJ’s guidance. If the central bank hints at a change in monetary policy, the local currency will likely appreciate. The opposite scenario would occur if policymakers offered a conservative tone, without hinting at potential rate hikes, even without clearly defining a date.

From a technical perspective, Valeria Bednarik, Chief Analyst at FXStreet, notes: “Given expectations of an on-hold BoJ and recent US Dollar strength, USD/JPY could surge following the announcement. The pair hit 148.80 mid-January, an immediate resistance level and a potential bullish target should the central bank offer a dovish stance. Technical readings in the daily chart suggest the pair is correcting overbought conditions, but the downside seems limited. The pair is developing above a flat 100-day Simple Moving Average (SMA) that is providing dynamic support at around 147.50. Technical indicators retreat from their recent highs but remain far above their midlines. Finally, a bullish 20-day SMA maintains its positive slope after crossing above an also bullish 200-day SMA.”

Bednarik adds: “The USD/JPY pair would need to extend its slump through 146.60 to become bearish and post a most sustained slump towards 145.00. However, such a scenario seems unlikely. Investors are also focusing on the US earning seasons, with Wall Street set to post record highs in the upcoming days. Stronger equities tend to underpin USD/JPY, limiting chances of a steeper decline.”

Bank of Japan FAQs

What is the Bank of Japan?

The Bank of Japan (BoJ) is the Japanese central bank, which sets monetary policy in the country. Its mandate is to issue banknotes and carry out currency and monetary control to ensure price stability, which means an inflation target of around 2%.

What has been the Bank of Japan’s policy?

The Bank of Japan has embarked in an ultra-loose monetary policy since 2013 in order to stimulate the economy and fuel inflation amid a low-inflationary environment. The bank’s policy is based on Quantitative and Qualitative Easing (QQE), or printing notes to buy assets such as government or corporate bonds to provide liquidity. In 2016, the bank doubled down on its strategy and further loosened policy by first introducing negative interest rates and then directly controlling the yield of its 10-year government bonds.

How do Bank of Japan’s decisions influence the Japanese Yen?

The Bank’s massive stimulus has caused the Yen to depreciate against its main currency peers. This process has exacerbated more recently due to an increasing policy divergence between the Bank of Japan and other main central banks, which have opted to increase interest rates sharply to fight decades-high levels of inflation. The BoJ’s policy of holding down rates has led to a widening differential with other currencies, dragging down the value of the Yen.

Is the Bank of Japan’s ultra-loose policy likely to change soon?

A weaker Yen and the spike in global energy prices have led to an increase in Japanese inflation, which has exceeded the BoJ’s 2% target. Still, the Bank judges that the sustainable and stable achievement of the 2% target has not yet come in sight, so any sudden change in the current policy looks unlikely.

Economic Indicator

Japan BoJ Monetary Policy Statement

At the end of each of its eight policy meetings, the Policy Board of the Bank of Japan (BoJ) releases an official monetary policy statement explaining its policy decision. By communicating the committee's decision as well as its view on the economic outlook and the fall of the committee’s votes regarding whether interest rates or other policy tools should be adjusted, the statement gives clues as to future changes in monetary policy. The statement may influence the volatility of the Japanese Yen (JPY) and determine a short-term positive or negative trend. A hawkish view is considered bullish for JPY, whereas a dovish view is considered bearish.