BoJ keeps monetary policy unchanged, likely to cut rates further in April, October

BoJ, as expected, maintained its base target and interest rate. It also made it clear that money reserve funds will be exempt from negative rates and will be added to the macro add on balance, which has negative rates. The central bank gave the usual assurances, such as the Japanese economy has continued to rebound modestly and that the BoJ will carry on with easing till the inflation target rate of 2% is attained.

The BoJ will further add easing if required as expectations for inflation have weakened in recent times. The Japanese central bank has to be wary of risks to price trend, while global financial markets continue to be unstable. Moreover, the recovery in exports has also halted. According to the central bank, the macro add on balance will be reviewed every three months.

It was just as well that the Bank of Japan decided not to cut negative rates further or expand asset purchases during the March meeting. According to recent evidence, which was gathered after the central bank’s decision in January and after ECB’s attempts to increase easing, the markets might not essentially respond the way the central bank would require, with EUR and JPY gaining sharply after the respective decision.

It is necessary to be cautious. Moreover, any changes in monetary policy are expected to take place in April and October rather than March. Having data for the entire three months after lowering rates into negative territory in January, BoJ will be able to come to a more informed decision.

“Our base case is for a cut to -0.20% in April, and a further cut to -0.30% in October”, says 4cast.

Even if it seems that the BoJ is lowering rates further into negative territory, in reality the case is different. As the macro add on balance will be assessed every three months, interest rates will be more malleable than first thought. Additional cut in interest rate is expected to have a limited affect on the market.