This was Governor Kuroda’s last central bank meeting and there had been some speculation that perhaps he would surprise markets by signaling the eventual exit of Japan’s ultra-loose monetary policy. In the end, the meeting was entirely uneventful and as expected.

The interest rate levels were kept at -0.10 and the BoJ committed to keeping 10-year Japanese bonds within a range of +0.5 and -0.5 around 0. The JGBs currently sits right at the top of that upper range as investors keep testing the upper limit wondering when the BoJ will stop defending the level. Governor Kuroda has kept the yield control in place as he leaves office.

Inflation expectations

Inflation in Japan is relatively low compared to inflation levels around the world even though the last reading in January was the highest in Japan since 1981 with a y/y reading of 4.3%.

In principle that should be positive for the BoJ in so much as it is exceeding its 2% inflation target. However, the BoJ still doesn’t see the current inflationary pressures as sustainable, so it doesn’t want to hike rates to contain inflation like many other central banks around the world. To underscore the point, BoJ’s Kuroda said after the meeting that it is premature to debate the specifics of any exit from monetary easing, policy rate and balance sheet are the main things to consider when the debate begins. The exit should only be considered when the 2% inflation target is sustainably achieved. The JPY weakened immediately out of the meeting as traders unwound predictions that Kuroda would leave with a surprise exit of the BoJ’s longstanding ultra-loose monetary policy.

For now, the BoJ is still strangely trying to encourage inflation in Japan while the rest of the world seeks to contain it. Will this divergent view end up a problem for the BoJ further down the line?