By Leika Kihara and Daniel Leussink
TOKYO (Reuters) – The Bank of Japan kept monetary policy steady on Thursday but signalled the chance of expanding stimulus as early as its next policy meeting in October by issuing a stronger warning over the risks threatening the economy.
As expected, the BOJ maintained its short-term interest rate target at -0.1% and a pledge to guide 10-year government bond yields around 0% under its yield curve control (YCC) policy.
Announcing its decision, the central bank said in a statement that it was becoming necessary to pay “closer attention” to the chance that the economy will lose sufficient momentum to achieve the BOJ’s 2% inflation target.
“Taking this situation into account, the BOJ will re-examine economic and price developments at its next policy meeting” when it reviews its long-term growth and price forecasts, it said.
The BOJ’s announcement came hours after the U.S. Federal Reserve cut interest rates to sustain a record-long economic expansion and insure against risks such as weak global growth and resurgent trade tensions.
“The BOJ stood pat today as yen moves were steady after the decisions by its U.S. and European peers, giving it some breathing room,” said Yasunari Ueno, chief market economist at Mizuho Securities.
“But the chance of a renewed yen spike remains a source of concern for the BOJ since central banks are now in a competition to ease policy,” he said, adding that the trigger for additional easing would be a yen rise above 100 to the dollar.
The yen <JPY=EBS> rose from a seven-week low versus the dollar and held onto those gains after the BOJ’s decision to keep policy steady for now. The dollar stood around 107.80 yen.
The BOJ’s decision to maintain its interest rate targets was made by a 7-2 vote, with board members Goushi Kataoka and Yutaka Harada dissenting.
BOJ Governor Haruhiko Kuroda will hold a news conference at 3:30 p.m. (0630 GMT) to explain the bank’s policy decision.
The BOJ next meets for a rate review on Oct. 30-31, when it will conduct a quarterly review of its long-term growth and inflation forecasts.
Market expectations of imminent easing grew after the BOJ pledged in July to act “without hesitation” and pre-emptively to fend off risks that could knock the economy off the path towards achieving its elusive 2% inflation target.
The BOJ maintained that pledge in its statement on Thursday, as well as a commitment it has made to keep current ultra-low rates at least until spring next year.
BOJ officials have said solid domestic demand is offsetting some of the weakness in exports, helping to sustain moderate economic expansion.
But waning hopes for a near-term rebound in global growth, and concerns about the impact a domestic sales tax hike in October, have made BOJ policymakers more open to discussing expanding stimulus, sources say.
Exports fell for a ninth straight month in August, while business morale hit the weakest level in 6-1/2 years. Disinflationary pressures are also on the rise again with surveys showing companies have cut selling prices for three straight months in a bid to salvage orders.
Cutting interest rates deeper into negative territory will be the key option when the BOJ next acts, although the central bank may accompany that with measures to mitigate the pain on financial institutions, sources have told Reuters.
(Additional reporting by Tetsushi Kajimoto and Kaori Kaneko; Editing by Kim Coghill & Simon Cameron-Moore)