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Economy

Bank of Japan underscores dovish lean with guidance change

Persistent low inflation leaves central bank with few options

The Bank of Japan now sees inflation falling short of its 2% target at least through fiscal 2021.

TOKYO -- The Bank of Japan's decision to maintain ultralow interest rates for at least another year reflects an increasingly pessimistic inflation outlook and uncertainty about the global economy, which gave the central bank little choice but to stay the course.

In its policy statement Thursday, the BOJ left the short-term interest rate at minus 0.1% and long-term rates around zero, but changed its forward guidance -- the outlook for policy that the bank began providing last July.

While previous statements said rates would remain extremely low "for an extended period," the latest announcement specified that this would last "at least through around spring 2020," taking into account factors including overseas economic developments.

Speaking with reporters after the policy board meeting, Gov. Haruhiko Kuroda acknowledged the risk that more specific guidance could tie the central bank's hands, but he argued that it would "further enhance the impact" of BOJ policy.

The BOJ chief went a step further, saying that low rates would remain in place for "quite a long time" beyond the announced spring 2020 period.

The decision comes amid dimming prospects for inflation reaching the central bank's 2% target. The BOJ's quarterly economic outlook report released Thursday put consumer price index growth at 1.6% in fiscal 2021, based on the median forecast of policy board members.

The move also owes to a recent dovish shift among other major central banks.

The U.S. Federal Reserve indicated in March that it would put rate hikes on hold for the year, following nine quarter-point increases since 2015, and hinted it could start cutting rates again if the economy runs out of steam. The European Central Bank also changed its policy outlook that month, saying rates would remain unchanged at least through 2019.

If either institution looks likely to return to looser monetary policy, expectations of a narrowing interest rate spread could drive the yen higher, potentially harming Japan's economy. By emphasizing that easing will continue for some time, the BOJ aims to avoid this and ensure it retains at least some room to maneuver.

But substantial moves will remain difficult. Pushing interest rates deeper into negative territory or further boosting purchases of Japanese government bonds would intensify the side effects of those policies, including lower bank earnings and impaired market functioning.

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