TOKYO -- The Bank of Japan continued to buck the global trend of monetary tightening to fight rising inflation, keeping its own policy ultraloose even as the yen nose-dives against the dollar.
"Raising interest rates or tightening monetary policy would add further downward pressure on a Japanese economy" that is still recovering from the COVID pandemic, BOJ Gov. Haruhiko Kuroda said in a press conference Friday after the monetary policy decision. "Such monetary policy steps would cool the economy and are therefore inappropriate."
The Japanese currency slid to a 24-year low against the greenback this week as the interest rate gap between Japan and the U.S. continues to widen. The yen's fall has fueled concern that the BOJ's position is exacerbating inflation and hurting the economy, rather than giving it a lift with low rates.
Friday's decision triggered a sharp downward movement in the yen, with the Japanese currency continuing to whipsaw amid volatile trading.
Kuroda acknowledged that the current easy monetary policy has harmful side-effects, such as a weaker yen. "Recent rapid falls in the yen heighten the uncertainty on the outlook and make it difficult for companies to set business plans," he said. "It's therefore negative for the economy and undesirable."
But he has stuck to his argument that the weaker yen is positive for the economy as a whole. "What's important is for companies that benefit from the weak yen to increase capital expenditure and wages," he said.
Ahead of Friday's decision, the yield on Japan's 10-year government bonds hit a six-year high, rising to 0.265% in early trading and putting it above the central bank's yield-curve control policy that seeks a cap of 0.25%.
Expectations for a policy shift had grown in recent weeks, but on Friday the BOJ nixed such expectations by reiterating its commitment to ultraloose monetary policy.
"The decision has all but confirmed that there will be no change to policy under Governor Haruhiko Kuroda," said Takashi Miwa, chief Japan economist at Nomura Securities.
Some market players had expected the BOJ would at least show some flexibility while maintaining its control over the interest rates, such as widening the yield target band for 10-year bonds or adjusting the forward guidance on policy. But there wasn't even the slightest sign of a policy shift in the latest statement.
"If the 10-year government bond yields exceeds 0.25%, that would diminish the effects of our monetary easing," Kuroda said when he was asked about making the policy framework more flexible. "We have no plan" to widen the yield target band, he said.
The yen slid to the 134 range from 133 territory against the dollar immediately after the release of the policy statement. It then quickly rallied to 132, before dropping back past 134.
Bank of Japan Gov. Haruhiko Kuroda speaks at a press conference on Friday. (Screenshot from video) "The latest decision is likely to encourage investors to build more short positions against the yen and Japanese government bonds," said Nomura's Miwa.
"The fact that the yen hasn't weakened so much indicates that there is even stronger risk-off sentiment in the market" following a sharp correction in U.S. stocks, he added. "The BOJ clearly sees a growing risk of a market sentiment deterioration and thinks that this is not a time for policy tightening."
After a two-day policy meeting, the BOJ decided to leave its main monetary levers unchanged, including guiding short-term interest rates to minus 0.1% and long-term rates to around zero. The central bank is also maintaining its purchases of government bonds and equities.
In New York overnight, the benchmark Dow Jones Industrial Average slid below 30,000 for the first time in 17 months amid growing concern that the U.S. economy could fall into a recession due to the sharp monetary tightening.
The decision to stand pat was mostly anticipated. Kuroda said as recently as Monday that he intends to patiently implement the easy monetary policy to stimulate the economy and achieve the stable 2% inflation that remains elusive in Japan.
The country's core consumer price index, which excludes fresh food items, rose in April above the BOJ's goal to 2.1% from a year earlier. Including fresh food, inflation was 2.5%.
Prime Minister Fumio Kishida's government faces an upper house election on July 10. The support rating for Kishida remains high, but it has recently taken a hit, with public discontent growing over the weak yen and inflation.
"The Kishida government apparently doesn't want to push too hard against the BOJ now, considering the growing downside risks to the economy," Miwa said.
By keeping its monetary stance so easy, the BOJ could exacerbate the yen's slide, as investors shift money out of Japan to other countries where they can expect better yields.
"The yen's weakening trend will continue," said Hideo Kumano, chief economist at Dai-ichi Life Research Institute. "On one hand, the government is trying to mitigate the impact of inflation, on the other hand, the BOJ continues a policy of fueling more inflation. This combination is inconsistent and will force the BOJ to eventually revise its policy."
The Nikkei Stock Average plummeted more than 700 points on Friday from the previous day's close, down nearly 2.7% at one point, before recovering to finish down 1.8%, at 25,963. Major stocks, including Toyota Motor and SoftBank Group, were trading lower.
On Thursday, The Bank of England decided to raise interest rates for the fifth consecutive meeting, while the Swiss National Bank raised its policy rate for the first time in 15 years, to minus 0.25% from minus 0.75%.
Other central banks have been tightening monetary policy as they try to douse inflation. In the U.S., the Federal Reserve raised its key rate by 75 basis points on Wednesday, as consumer inflation runs at a 40-year high of 8.6%. The European Central Bank also decided to raise interest rates next month.