BOJ To Keep Ultra-low Rates, Remain Global Outlier Despite Weak Yen

The Bank of Japan is expected to keep interest rates ultra-low on Thursday and reassure markets that it will continue to swim against a global tide of central banks tightening monetary policy to combat soaring inflation.

Any such decision could drive down the Japanese currency further from 24-year lows hit in recent weeks, as investors focus on the widening gap between Japan's ultra-low interest rates and the U.S. Federal Reserve's aggressive rate hike plans.

At the two-day meeting ending on Thursday, the BOJ is set to leave unchanged its -0.1% target for short-term interest rates, and 0% for the 10-year government bond yield under its yield curve control (YCC) policy.

Markets are focusing on whether the BOJ would make any tweaks to its dovish guidance projecting short- and long-term interest rates to remain at "current or lower" levels, and a pledge to ramp up stimulus "without hesitation" with an eye on the economic impact of the COVID-19 pandemic.

"Making big changes to the BOJ's guidance could stoke market speculation of an early exit from YCC, and cause big disruptions in the bond market," said Naomi Muguruma, chief bond strategist at Mitsubishi UFJ Morgan Stanley Securities.

"That's something the BOJ will probably avoid this time," she said. "With other central banks hiking rates, the BOJ's negative rate policy will come under the spotlight and may unleash further yen selling."

The BOJ's rate review will be the first one for Hajime Takata and Naoki Tamura, who joined the nine-member board in July. They succeeded former commercial banker Hitoshi Suzuki and economist Goushi Kataoka, a vocal advocate of aggressive easing who consistently voted against keeping rates steady.

A unanimous vote would suggest the two newcomers are unlikely to rock the boat on monetary policy for the time being.

Japan's core consumer inflation quickened to 2.8% in August, exceeding the BOJ's 2% target for a fifth straight month, as price pressure from raw materials and yen falls broadened.

But BOJ Governor Haruhiko Kuroda has ruled out the chance of a near-term withdrawal of stimulus on the view that wages need to rise more to sustainably achieve his 2% inflation target.

Kuroda's dovish message has worked to weaken the yen, contradicting the government's efforts to slow the currency's decline through verbal threats of yen-buying intervention.

Once welcomed for the boost it gives to exports, a weak yen has turned into a headache for Japanese policymakers as it pushes up the cost of importing already expensive fuel and raw materials.

The world's third largest economy expanded an annualised 3.5% in April-June, but its recovery has been hobbled by a resurgence in COVID-19 infections, supply constraints and rising raw material costs.