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Economy

BOJ chief rejects talk of interest rate rise, maintains easing stance

Japanese central bank stands pat despite rate hike in US

BOJ Gov. Haruhiko Kuroda speaks at a press conference in Tokyo on March 16.

TOKYO -- Bank of Japan Gov. Haruhiko Kuroda reiterated the central bank's stance to keep the country's long term interest rate pegged at around 0%, as the bank continues its efforts to free Japan from the grip of deflation.

The central bank on Thursday decided to keep its monetary policy unchanged, applying an interest rate of minus 0.1% to some excess reserves held at the bank by financial institutions, as well as to aim to keep the yield on 10-year Japanese government bonds, or long-term interest rates, at around 0%. The decision puts the BOJ in stark contrast to the U.S., where the Federal Reserve Bank raised its interest rate on Wednesday.

"Japan's inflation is maintaining its momentum toward [the bank's target of] 2%, but it is lacking strength," Kuroda said at a press conference, explaining the reason for the decision. "There is still some way to go until reaching 2%. We deemed it appropriate to continue with our powerful monetary easing program to reach this target at the earliest possible time."

Some economists expect the BOJ to raise its long-term interest rate target sometime this year, but Kuroda gave no indication of the conditions needed to trigger a change in the target, saying the bank will decide when the time is right by monitoring various economic indicators.

There are good reasons for his caution, chief of which is lackluster growth in wages, which the bank sees as key to achieving its inflation target.

Annual wage negotiations between labor and management this year among leading Japanese companies have resulted in a fourth straight year of base pay hikes. However, a Nikkei survey covering 90 of these businesses showed that 55.6% offered smaller increases this year than last. Another 13.3% said they offered hikes on par with those in 2016, while only 11.1% intend to raise base wages more than last year.

"The BOJ has said repeatedly that we intend to create a virtuous cycle where wage and corporate earnings rise in conjunction with the inflation rate. That companies are planning a fourth consecutive year of wage raises supports this," Kuroda said. "I hope these efforts continue on both labor and management levels."

Whether companies will go along with Kuroda's wishes remains unclear, as corporations remain cautious over potential global developments such as policy changes under U.S. President Donald Trump. Uncertainty over earnings factored into wage decisions for 21.3% of the Nikkei survey respondents, while 14.6% cited uncertainty regarding an improvement in business sentiment.

Positive news

There are, however, positives for the BOJ. Yamato Transport, which controls about half of the domestic home delivery market, plans to raise its shipping rates across the board for the first time in 27 years by the end of September.

"If [this news makes] people recognize the necessity of wage and price increases due to the tightening of the labor market, and consumers feel that price increases are inevitable, it will likely lead to an improvement in the expected inflation rate," wrote Naomi Muguruma, senior market economist at Mitsubishi UFJ Morgan Stanley Securities.

Added to that, the price of oil has stabilized, and the yen has weakened, resulting in consumer prices excluding fresh food rising year-on-year for the first time in 13 months in January.

"The BOJ must be feeling a sense of relief," Muguruma said. "I don't think the BOJ has any incentive to spoil that itself by stoking expectations on the end of monetary easing" like raising its long term interest rate target.

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