BOJ Place Rates on Hold

The Bank of Japan held off on expanding stimulus on today despite once again pushing back the timing for hitting its inflation target, signaling that it will keep policy unchanged unless a severe shock threatens to derail a fragile economic recovery.

In a widely expected move, however, the BOJ maintained its minus 0.1 percent short-term interest rate target and a pledge to guide 10-year government bond yields at around zero percent.

The Bank of Japan said it now sees the consumer price index rising 1.5 per cent in fiscal 2017, versus a forecast in July of 1.7 per cent, and pushed out the date by which it expects inflation to hit its 2 per cent target to toward the end of fiscal 2018.

The central bank also cut its inflation forecasts for fiscal 2017 and 2018, blaming weak overseas demand and waning public conviction that prices and economic activity will pick up.

The Bank maintained its purchase of the Japanese Government Bonds so that the 10-year Japanese Government Bond yield will remain at zero percent. The central bank also committed to increase annual ETF purchases at a rate of 6 trillion yen. The BOJ agreed to nearly double the pace of ETF purchases at the July 29 meeting.

Next month's US presidential election likely will be the key driver of USDJPY over the short term as the election outcome will have quite binary implications on JPY. If the Republicans win the presidential race, JPY is likely to rally significantly short term amid risk-off trading. If the Democrats win, the market reaction is likely to be limited as it has been largely priced in.

Japan's economy expanded for the second straight quarter in April-June but many analysts expect growth to remain modest for the rest of this year, with exports and output weak on sluggish global demand.

Ethan Harris at Bank of America Merrill Lynch said such moves were “widely telegraphed by the central bank over the past week” and thus no surprise to markets.

Still, this meeting “provides a good opportunity to step back and look at the economic and policy outlook, we continue to expect the BoJ to keep its foot planted on the accelerator, but not offer new easing measures unless there is a deflationary shock,” he said.

"The BOJ has settled down for a long-drawn-out war to achieve its inflation target, so a delay in meeting the timing alone would not force it into action," said Yasunari Ueno, chief market economist at Mizuho Securities.

Slow wage growth has also hurt consumption, further undermining the chance of a strong near-term revival in the world's third-largest economy.