June 16, 2017 12:01 pm JST

Bank of Japan keeps rates steady; inflation still sluggish

Demand picking up, but easing to continue as BOJ and Fed diverge

SHOTARO TANI, Nikkei staff writer

TOKYO -- The Bank of Japan on Friday kept its monetary policy unchanged, as it continues its battle to snap the country out of its deflationary malaise.

The BOJ's policy board voted 7-2 to maintain an interest rate of -0.1% for some excess reserves held at the bank by financial institutions, as well as its effort to keep the yield on 10-year Japanese government bonds, or long-term interest rates, near zero.

To hold long rates at that level, the central bank will maintain the pace of its JGBs purchases, increasing its holdings of government bonds by about 80 trillion yen ($720 billion) annually.

Government data released Wednesday indicated that Japan's demand exceeded its output capacity for two straight quarters for the first time in three years. This is good news for the BOJ, as it will put upward pressure on prices. The inflation rate has been inching up over the past few months, with the consumer price index in April, excluding volatile fresh food prices, rising 0.3% on the year.

But that is still far from the central bank's target of 2% annual inflation, and the bank decided to continue its aggressive monetary easing.

"Japan's economy has been turning toward a moderate expansion," the BOJ said in a statement. "The bank will continue with 'quantitative and qualitative monetary easing, with yield-curve control,' aiming to achieve the price stability target of 2%, as long as it is necessary," it said.

The BOJ's decision to hold rates at record lows, even as the U.S. Federal Reserve raised its own interest rates to the 1-1.25% range on Wednesday, highlights the global divergence among central banks. The European Central Bank is also expected to signal an exit from its own monetary easing in the not-too-distant future.

Japan's monetary authority is unlikely to follow in their footsteps anytime soon, but talks on the central bank's financial health and policy normalization have taken center stage in recent months. BOJ Gov. Haruhiko Kuroda will hold a news conference this afternoon, where he is likely to face questions on the matter.

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