Bank of Japan keeps monetary easing policy despite U.S., Europe rate hikes

The Bank of Japan on Friday stuck to its monetary easing policy even as other central banks raise interest rates to tame inflation, but said it would "pay due attention" to forex markets as the yen struggles at a 24-year low.

The decision to hold rates at minus 0.1 percent  part of a decade-old plan to boost the world's third-largest economy  bucks a tightening trend by central banks globally aimed at battling sky-high fuel and food prices linked to the Ukraine war.

The hikes have been led by the U.S. Federal Reserve, which this week announced its most aggressive increase in nearly 30 years and signaled more were in the pipeline. The European Central Bank also plans to start a series of rate increases next month, the first in more than a decade, while the Bank of England announced a fifth straight increase on Thursday and Switzerland surprised markets with its own rate hike, the first since 2007. The widening chasm between Japanese and U.S. monetary policy this week pushed the yen to its lowest level against the dollar since 1998, a cause for increasing concern that even the central bank made reference to after its meeting Friday. "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, in an unusual reference to forex movements.

After the announcement, one dollar bought 134.63 yen, up from 133.41 yen earlier in the day. A weaker yen helps Japanese exporters as it inflates repatriated profits, noted Yoshikiyo Shimamine, executive chief economist of Dai-ichi Life Research Institute.

For the BOJ, it may be that "these benefits overwhelm the negative aspects of a cheaper yen -- high prices for imported goods, which causes people to suffer without sufficient pay rises," he told AFP. The bank's ultra-loose monetary policy aims to achieve two-percent inflation, a target that has been stubbornly out of reach during years of price stagnation.

In April, core consumer prices hit the target for the first time since 2015, but the BOJ has cautioned that it sees recent rising prices as a temporary and volatile trend.

Inflation has been rising for months in the United States and elsewhere as buoyant demand for homes, cars and other goods clashes with supply problems caused by COVID-19 lockdowns in China and other pandemic hold-ups.

The problem became dramatically worse after Russia invaded Ukraine in February and Western nations imposed steep sanctions on Moscow, sending food and fuel prices soaring, a particular problem in resource-poor Japan.

Stephen Innes at SPI Asset Management said the BOJ may have decided that a potential rout of Tokyo stocks caused by "a hawkish pivot... could see Japanese investors worse off than the current hit to purchasing power via a weaker currency."

The statement on forex is a nod to the government's concerns over the yen's weakness, but "does not, on its own, indicate an imminent change in policy", he said.