For the second time in three months the Bank of Japan has stunned financial markets, leaving monetary policy unchanged following its April monetary policy meeting.
Voting 8-1 in favour of the measure, the bank maintained its pledge to increase the nation’s monetary base at an annual rate of around 80 trillion yen, bucking expectations for an increase in asset purchases that many has been forecasting.
It also left interest rates at -0.1%, refraining from taking them even deeper into negative territory.
On the outlook for policy, the board stated that it will continue with “QQE with a negative interest rate, aiming to achieve the price stability target of 2%, as long as it is necessary for maintaining that target in a stable manner”.
It also also affirmed that it will undertake additional easing measures “if it is judged necessary for achieving the price stability target”.
While the bank made no changes to monetary policy, the board voted unanimously to create a 300 billion yen program offering loans at 0% to
financial institutions in areas hit by a series of earthquakes in southern Japan in April.
Surprisingly, the decision to leave monetary policy unchanged came despite the bank trimming its expectations for inflation and economic growth in its separate quarterly outlook for economic activity and prices report released alongside the rate decision.
On inflation, the bank now sees core inflation — than excluding fresh food prices — increasing to 0.5% in the current financial year, down from 0.8% that it projected in January.
Looking further out, inflation is tipped to increase by 1.7% in 2017/18 before rising to 1.9% in 2018/19.
The bank stated that it now sees CPI reaching around 2% during fiscal year 2017, ending in March 2018. Previously it forecast that it would hit this target in the first half of FY 2017.
Core inflation currently stands at -0.3%, the steepest annual decline seen in three years.
Like the outlook for prices, the BOJ also downgraded its forecast for economic growth, predicting that real GDP will increase by 1.2% in 2016/17, down from 1.5% seen in January.
Further ahead, growth in 2017/18 is now seen at just 0.1%, down from 0.3% forecast previously.
The monetary policy decision — a surprise to many in financial markets who were expecting a further rate cut or increase in assets purchases, or both — along with the inflation and GDP growth downgrades, has seen stocks plunge and put a rocket under the Japanese yen.
The USD/JPY currently sits at 109.3, down 1.9% for the session.
The Nikkei 225 has also plunged by 2.33%, having been up more than 1% prior to the announcement.