Bank of Japan projections continue to maintain low interest rates

Sources have predicted that the Bank of Japan will maintain its ultra-lenient monetary policy next week and forecast a mild economic recovery, as strong corporate and household spending eases the blow of slowing external demand.

But no upgrade in inflation’s view is likely to automatically raise interest rates, with the governor of the Bank of Japan, Kazu Uida, stressing the need to maintain a very broad policy until lasting wage growth is accompanied by higher prices.

Oweda told parliament on Friday that companies’ price-setting behaviour showed changes that could increase inflation more than expected.

“But the Bank of Japan must support the economy to ensure that recent positive signs continue, and help Japan achieve 2% sustainable inflation,” he continued, a view echoed by two other sources.

At the two-day policy meeting ending June 16, the Bank of Japan is likely to maintain a short-term interest rate target of 0.1% and a 0% cap on the 10-year bond yield set under the yield curve control policy (YCC).

Sources said the Bank of Japan could offer a somewhat bleak view on exports and production, reflecting weak demand for the United States and China, compared to the previous meeting in April. In April, it said exports and production were moving sideways.

But the Bank of Japan will stick to its view that the world’s third-largest economy is heading for a mild recovery as the post-pandemic recovery in consumption offsets weak exports, they say.

Japan’s economy expanded by 2.7% stronger than expected in the first quarter thanks to strong capital spending and strong domestic demand.