On September 20, the Bank of Japan decided to temporarily halt the interest rate hike, maintaining the policy interest rate at 0.25%, which is in line with market expectations.

Full text of the interest rate decision.

1. At today's monetary policy meeting, the Bank of Japan Policy Board unanimously decided to set the following guidelines for the market operations during the meeting period:

The Bank of Japan will encourage the unsecured overnight call rate to remain at around 0.25%.

2. The Japanese economy is experiencing a mild recovery, although there are some signs of weakness in certain areas. Overall, the overseas economy is growing moderately. Exports and industrial production are holding steady. Against the backdrop of improved corporate profits, there is a mild growth trend in fixed asset investment by companies. Employment and income conditions have improved. Despite factors such as price increases, private consumption continues to show a mild growth trend.

Residential investment is relatively weak, while public investment is holding steady. The financial environment remains accommodative. In terms of prices, the year-on-year increase in the Consumer Price Index (CPI) excluding fresh food has recently remained between 2.5% and 3.0%. Service prices continue to rise moderately, mainly reflecting the impact of wage growth, while the transmission effect of cost increases due to rising import prices to consumer prices is weakening. Inflation expectations are rising moderately.

It is expected that the Japanese economy will continue to grow at a pace higher than its potential growth rate, while the overseas economy will maintain moderate growth. This is accompanied by a gradual strengthening of the virtuous cycle from income to expenditures, which benefits from factors such as accommodative financial environment. Although the impact of cost transmission from rising import prices to consumer prices is expected to gradually fade, the effect of government measures to suppress CPI inflation is expected to gradually diminish, leading to a slight increase in the year-on-year increase in CPI excluding fresh food by the 2025 fiscal year.

At the same time, as the output gap improves and the benign cycle between wages and prices intensifies, it is expected that medium- to long-term inflation expectations will rise and the underlying CPI inflation will gradually increase. In the second half of the forecast period in July 2024 in the 'Outlook for Economic Activity and Prices', it is expected that the CPI will reach a level that is essentially in line with the price stability target.

There are still high levels of uncertainty regarding the economic and price outlook, including overseas economic activity and price trends, changes in commodity prices, and the wage and pricing behavior of domestic companies. In this context, it is necessary to closely monitor changes in the financial and foreign exchange markets and their impact on the Japanese economic activity and prices. In particular, with companies raising wages and prices more recently, exchange rate fluctuations are more likely to affect prices compared to the past.

Editor/Rocky