TheBank of Japan opted to wait before furthereasing policy in a closely watched meeting, defying calls for strongerstimulus, as monetary policymakers sought time to assess whether still-freshnegative interest rates will breathe life into the country's sagging economy.
Aftera two-day meeting that ended April 28, the BOJ it will continue to expand themonetary base by ¥80 trillion eachyear through government bondpurchases. As decided in December 2015,from April, thecentral bank willincrease its annual exchange-traded fund investments by ¥300 billion to ¥3.3 trillion. It will keepbuying ¥90billion of domestic REITs every year.
TheBOJ will also maintain a negative 0.1% rate on some reserves from commercialbanks. The central bank unexpectedly decided to introduce the deposit fee in late January.The measure has further pushed down already-low interest rates in Japan, but itis too soon for it to lift the economy, BOJ Governor Haruhiko Kuroda said at abriefing after the decision.
"Theeffects of quantitative and qualitative monetary easing have been observed inthe financial sector — government bond yields have fallen sharply, and loanbenchmark rates and mortgage rates have clearly declined. Such effects wouldpenetrate the real economy, but it would take a while before you can observeit," Kuroda said.
"Wedecided that it is important to closely watch the degree of penetration."
Priorto the latest policy meeting, 23 of 41 economists surveyed by Bloombergexpected the BOJ to deepen easing, as economic data shows the current,unprecedented stimulus efforts are not translating into growth. Japan's GDPcontracted in the fourth quarter of 2015, while in March, consumer pricesdeclined the most since April 2013, which is when Kuroda embarked onquantitative easing. Such figures cast doubts on whether the central bank canmeet its 2% inflation goal by March 2018.
Marketsreacted instantly, with the yen rising and stocks falling.
"Perhapsthey need time to sufficiently assess the effects of the negative interest ratepolicy," Takeshi Minami, a senior economist at Norinchukin ResearchInstitute, said in an interview. "Markets had built up expectations andgot disappointed."
Consideringweak economic indicators, the BOJ's inaction is a "bold" decision,Kohei Iwahara, an economist for Japan and Pacific at Natixis, said in an April28 note.
Aslong as the yen weakens, with the U.S. Federal Reserve starting raising ratesagain in June, the BOJ will likely stand pat for the rest of the year, Iwaharasaid. The Japanese government, on the other hand, will probably come out with afiscal stimulus package.
Still,there remains plenty of uncertainty. A delay in rate hikes in the U.S., for onething, can push up the Japanese currency. And should the yen appreciate toorapidly, the BOJ "may be forced to act before the fiscal measures arereally ready," Alicia Garcia Herrero, chief economist for Asia-Pacific atNatixis, said in an email.
Theimpact of recent natural disasters only adds to challenges for monetarypolicymakers in Japan. Earthquakes jolted Kumamoto prefecture on April 14 and two days later, leaving 49 people dead and morethan 1,000 injured; the most severe damage sinceMarch 2011.
Manufacturers including Toyota Motor Corp.and Sony Corp. suspended part of their operations in the affected region for as long as two weeks.
TheBOJ said April 28 that it will offer ¥300 billion of zero-interest loans tofinancial institutions in areas hit by the earthquakes.
"The BOJ has to fight an uphillbattle not to let the situation slip back [to where it was before Kuroda took over], and the fight would take along time," Hajime Takada, an economistat Mizuho Research Institute, said in an April 26 note.
"Inthe past three years, theBOJ has been aiming to produce results quickly with an ambitious inflation targetand by surprising the market with bold moves. But it hasn't worked very well."
As of April 27, US$1 wasequivalent to ¥111.27.