Bank of Japan leaves monetary policy unchanged

The Bank of Japan left rates unchanged in negative territory on Tuesday and kept the pace of asset purchases steady at Y80trn a year as it sounded a cautious note on the economic outlook.

The central bank kept the benchmark interest rate at -0.1% as widely expected. The board voted 8-1 to keep asset purchases as they are and 7-2 to stand pat on rates.

The central bank downgraded its inflation expectations and repeated its stance that further easing would be implemented if necessary to meet the 2% inflation target.

In addition, it pointed to external risks from emerging and commodity-exporting economies, in particular China, and the impact of US monetary policy.

BOJ Governor Haruhiko Kuroda said: "Japan's economy continues to recover moderately as a trend, although some weaknesses are seen in exports and output on slowing growth in emerging economies."

Back in January – when the BoJ took markets by surprise by cutting interest rates into negative territory – the bank had said a pick-up in exports was underpinning a moderate economic recovery.

The Bank of Japan said on Tuesday that money reserve funds, which are a low-risk product offered to investors to park their cash temporarily, will be exempt from the negative rate and instead, a zero rate will be applied.

Asian markets were in the red after announcement, with only China’s Shanghai Composite in positive territory.

“There were no surprises from the Bank of Japan in terms of its policy actions as nothing changed, and this was as expected,” said David Morrison, market analyst at SpreadCo.

“However, the Nikkei fell and yen jumped after the BoJ said that negative rates impair the function of financial markets, and suggested that there won’t be any further cuts into negative territory. This suggests that the BOJ believes it made a policy error in January. It also must cast doubts over similar moves from the ECB, although arguably the latter has put in place measures which offset many of the problems of negative rates as they apply to the banking sector.”