The Bank of Japan's nine-member board decide in a unanimous vote to hold the overnight interest rate target steady in a range of zero to 0.1 percent, as widely expected, after conducting its first rate hike in 17 years and ending the seven-year-old yield curve control framework in a 7 to 2 vote last month.

In light of the highest pace of wage in more than three decades, the bank is now in the process of gradually normalizing the bank's monetary policy after 11 years of aggressive easing has fulfilled its purpose of turning around the stubborn deflation mindset among households and businesses. Since the short-term rate is still very low, bank officials have stressed that the monetary conditions will remain accommodative for now. But Governor Kazuo Ueda has also said that if the depreciation of the yen pushes up import costs and thus inflation, having a huge impact that cannot be ignored,"it could cause a change in monetary policy."

"Japan's economy is likely to keep growing at a pace above its potential growth rate (estimated by the bank to be 0.5 to 1.0 percent), with overseas economies growing moderately and as a virtuous cycle from income to spending gradually intensifies against the background of factors such as accommodative financial conditions," the BOJ predicted in its quarterly Outlook Report.

It sounds more upbeat than its view in January:"Japan's economy is likely to continue recovering moderately for the time being, supported by factors such as the materialization of pent-up demand, although it is expected to be under downward pressure stemming from a slowdown in the pace of recovery in overseas economies. Thereafter, as a virtuous cycle from income to spending gradually intensifies, Japan's economy is projected to continue growing at a pace above its potential growth rate."

"With regard to the risk balance, risks to economic activity are generally balanced for fiscal 2024 onward," the bank said."Risks to prices are skewed to the upside for fiscal 2024 but generally balanced thereafter." This compares with its January assessment that"risks to both economic activity and prices are generally balanced."

For fiscal 2024 ending in March 2025, the median forecast for the year-over-year increase in the core consumer price index (excluding fresh food) is 2.8 percent, revised up from 2.4 percent in January, when it was revised down from 2.8 percent in October due to the impact of utility subsidies. The core CPI rose 2.8 percent in fiscal 2023, as forecast by the BoJ, after rising 3.0 percent in fiscal 2022 and edging up 0.1 percent in fiscal 2021. The board's inflation projection for fiscal 2025 is 1.9 percent, revised up slightly from 1.8 percent in January, and its first estimate for fiscal 2026 is 1.9 percent, indicating inflation is expected to be anchored around the bank's 2 percent target.

The board's median economic growth forecast for fiscal 2024 is 0.8 percent, revised down from 1.2 percent projected about three months ago. Its GDP forecast for fiscal 2025 is unchanged at 1.0 percent. The board expects the economy to grow at 1.0 percent in fiscal 2026, its first forecast. The board forecast that GDP in fiscal 2023 grew 1.3 percent (compared to 1.8 percent projected in January), data to be included in the first quarter GDP report to be released on May 16.

Looking ahead, the bank repeated its recent assessment that"there are extremely high uncertainties" surrounding Japan's economy including developments in overseas economic activities and prices, commodity prices as well as domestic firms' wage- and price-setting behavior."Under these circumstances, it is necessary to pay due attention to developments in financial and foreign exchange markets and their impact on Japan's economic activity and prices," the BoJ said.

The board also maintained its asset purchase program, saying,"Regarding the purchases of Japanese government bonds, CP (commercial paper) and corporate bonds, the bank will conduct purchases in accordance with the decisions made at the March 2024 MPM (monetary policy meeting)."

Last month it decided to no longer target the yield on 10-year Japanese government bonds (JGBs), which had been capped at around 0.1 percent, but also decided to continue its purchases of JGBs"with broadly the same amount as before," which was about 6 trillion yen a month. In case of a rapid rise in long-term rates, the bank said at the time that it would"make nimble responses by, for example, increasing the amount of JGB purchases and conducting fixed-rate purchases of JGBs." In March, the board also decided unanimously to stop new purchases of exchange-traded funds (ETFs) and Japan real estate investment trusts (J-REITS), and discontinue the purchases of commercial paper and corporate bonds in about a year by reducing them gradually. The bank used those large-scale asset purchases to support market and economic sentiment.

The Bank of Japan is expected to hold the overnight interest rate target steady in a range of zero to 0.1 percent after conducting its first rate hike in 17 years and ending the seven-year-old yield curve control framework last month. The next rate hike is likely to be in July, September or October, when more evidence of a higher pace of wage hikes emerges. At their March meeting, many board members judged that the risk of Japan's economy slipping back into deflation had been reduced and inflation was likely to be led by sustained wage hikes, instead of a spike in import costs, following news that wage hikes for fiscal 2024 ending in March 2025 were set to well surpass the pace of increase seen in the previous year.

Governor Kazuo Ueda told a post-meeting news conference on March 19 that the pace of further rate hikes as part of the bank's policy normalization process is likely to be gradual. The accommodative financial environment will continue as long as the BoJ's policy interest rate stays below the level that is considered neutral to economic activity, he said. Asked about the pace of further rate hikes, Ueda replied,"It depends on the economic and price conditions but based on the outlook we have now, I think we can avoid a path of a drastic increase." Last week, Ueda also told reporters that
if the depreciation of the yen pushes up import costs and thus inflation, having a huge impact that cannot be ignored,"it could cause a change in monetary policy."

The BoJ will also release its quarterly Outlook Report to provide the board's latest outlook for economic growth and inflation as well as risk analysis including its first economic estimate for fiscal 2026.

The Bank of Japan is the central bank of Japan. The Bank of Japan Act states that the bank's monetary policy should be aimed at"achieving price stability, thereby contributing to the sound development of the national economy." The nine-member policy board reviews economic conditions at home and abroad before making a policy decision. There is no specific time for the announcement. The board holds eight two-day Monetary Policy Meetings a year, in January, March, April, June, July, September, October and December. At each meeting, the board votes on the proposals on the bank’s monetary policy stance and the basic guideline on how to achieve the policy target submitted by the chair of the board, who is the bank governor.

The announcement of the bank’s monetary policy decision after each meeting can cause a market reaction, even when there is no change to the policy stance. Markets tend to look ahead toward a policy shift, pricing in a change to the bank’s targets for overnight and long-term interest rates, the pace of financial asset purchases or the scale of market operations.

Market participants closely monitor the news conference by the BoJ governor that usually starts at 1530 JST (0130 EST/0230 EDT/0630 GMT), a few hours after the bank releases its policy decision. Comments from the governor could provide clues to what the bank may or may not do in the near term, which in turn could trigger buying or selling of the yen against the dollar.

Since April 2023, the bank has been conducting a"broad-perspective review" of the costs and benefits of its various monetary easing measures implemented in the past 25 years. The negative overnight interest rate target introduced in January 2016 has been unpopular among lenders as it squeezes their profit margins.