On Thursday, the Bank of Japan (BOJ) decided not to raise interest rates, opting to maintain its monetary policy unchanged due to heightened market volatility stemming from the conflict between the United States and Israel in the Middle East.
Investors have always harbored concerns about a potential interest rate hike by the BOJ, particularly on August 5, 2024. Therefore, the central bank's temporary decision to hold steady has undoubtedly provided some relief, as the market is already facing numerous challenges.
During Japan's monetary policy meeting, board members voted 8-1 to maintain the guidelines for money market operations until the next meeting. The BOJ stated that it will continue to encourage the overnight unsecured call rate to remain at approximately 0.75%.
Domestically, exports and industrial production have remained generally stable. While corporate profits are still high, tariff policies have had a certain impact on manufacturing. Meanwhile, corporate fixed investment continues to grow moderately.
Private consumption has remained relatively stable due to improvements in employment and income, but high prices have put pressure on household spending. Housing investment continues to decline, while public investment has remained largely flat. Banks also noted that financial conditions remain accommodative.
The BOJ decided to maintain interest rates against the backdrop of falling food prices and rising oil prices.
Regarding inflation, the central bank stated that the year-on-year increase in the consumer price index (CPI), excluding fresh food, had once exceeded 2%. This increase was partly due to rising food prices, including a surge in rice prices. Recently, this increase has fallen back to around 2%, thanks to government measures to alleviate the impact of rising energy prices on households.
The central bank also indicated that inflation expectations have risen moderately, which is crucial as policymakers assess whether price growth is sufficiently broad-based and sustainable, rather than being driven solely by a few items experiencing significant price increases.
However, the central bank also warned that trade and policy in various regions will continue to affect economic development. More prominently, tensions in the Middle East have led to increased volatility in global financial and capital markets, with crude oil prices rising sharply, requiring close attention to future developments.
Concerning prices, the central bank expects that the year-on-year increase in the CPI, excluding fresh food, may temporarily fall below 2%. This expectation stems from the gradual weakening of the impact of rising food prices (including rice prices) and the continued effect of government measures.
Nevertheless, the central bank anticipates that future price pressures may rise again with the increase in crude oil prices. At the same time, wages and prices are expected to continue rising together at a moderate pace.
The BOJ also pointed out that as the economy improves, labor shortages will become more apparent, and medium- to long-term inflation expectations will receive further attention.