On January 23, during a pivotal monetary policy meeting held over two days, the Bank of Japan reaffirmed its commitment to ultra-loose monetary policies, maintaining short-term interest rates at a level of -0.1%, aligning with market expectationsCentral bank officials emphasized the continuation of this approach, signifying their readiness to enhance easing measures should economic conditions necessitate such actions.

In projections released at this meeting, the Bank of Japan forecasted a median core Consumer Price Index (CPI) of 2.4% for the fiscal year 2024, a slight adjustment from the previous forecast of 2.8% made in OctoberSimilarly, projections for fiscal year 2025 indicated a core CPI forecast at 1.8%, up from an earlier estimate of 1.7%. Additionally, the outlook for GDP growth was modified, with the 2023 fiscal year estimate revised downwards from 2% to 1.8%, while the forecast for fiscal year 2024 was raised from 1.0% to 1.2%.

As the last major central bank to maintain a negative interest rate, the Bank of Japan acknowledges the ongoing mild recovery in Japan's economy but remains cautious about whether this recovery can sustain a positive cycle of rising wages and stable prices

By keeping rates low, the bank aims to bolster the upcoming spring labor negotiations, encouraging wage hikes that could enhance household spending and drive economic growth.

Debating the Duration of Negative Rates

In its recent communications, the Bank of Japan asserted that it would keep deposit rates at -0.1%, maintain a target yield of around 0% for 10-year government bonds, allowed to fluctuate +/- 1%, and purchase government bonds as necessary without setting a capThe decision to remain on hold was further supported by recent data indicating a decline in Japan's CPI (excluding fresh food) for the second consecutive month, offering the central bank more reason to maintain its current stance.

Moreover, certain economists argue that external factors, including the impact of a significant earthquake that struck Noto Peninsula and Prime Minister Fumio Kishida's entanglement in a political scandal involving illicit funds, have influenced the central bank's decision-making process

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On January 1, a powerful 7.6 magnitude earthquake hit Noto Peninsula, triggering a tsunami, and initial assessments estimate the resulting economic damage could exceed 800 billion yen, approximately 0.15% of Japan's nominal GDP.

Simultaneously, the ruling Liberal Democratic Party (LDP) faced significant political turbulence following revelations of a scandal in November last year concerning 'dark money.' Allegations surfaced detailing how LDP factions pressured party members to meet fundraising quotas through the sales of political event tickets, with any surplus funds returned to members as kickbacks—money not accounted for in official reports, thus evading scrutinyFollowing these revelations, the Tokyo District Public Prosecutors Office initiated an investigation.

In light of the 'dark money' scandal, Prime Minister Kishida announced on January 19 the dissolution of the faction he once led, prompting other influential factions, including the largest factions in the LDP, to follow suit in disbanding

Collectively, these factions account for a significant portion of the party's parliamentary strength, with 182 members, nearly half of the LDP's total.

As market participants watch closely, the key question remains when Japan will withdraw from its negative interest rate policySome economists suggest that after the conclusion of this year's spring labor negotiations in March, a timely shift may be possibleFollowing substantial wage increases achieved in 2023, major employers in Japan are expected to initiate another round of pay hikes in 2024, potentially augmenting household spending and creating a compelling case for the Bank of Japan to eventually taper its aggressive monetary support.

Reports from Kyodo News indicate a general consensus within the central bank that many large corporations will likely opt for significant salary increases during the spring negotiations, spurred by positive corporate performance and a growing labor shortage

Nonetheless, opinions remain divided on the criterion for evaluating the potential achievement of these goals, particularly regarding responses from large corporations and the corresponding effects on small and medium enterprises.

UBS analysts predict the BoJ could raise the policy interest rate from -0.1% to 0.0% by April, concurrently discontinuing its Yield Curve Control (YCC) policyWhile March is also a possibility for such action, it may prove too close to the scheduled release of Spring wage negotiations and could lead to over-optimism regarding the US economy or considerations about weakened domestic consumption in the first quarter, thus favoring a delayed approach until April.

Bank of Japan Governor Kazuo Ueda did not provide a clear directive during the press conference, indicating, “We will assess whether to continue large-scale monetary easing measures, including negative interest rates, as we approach the realization of our inflation target of 2%. At this point, it is difficult to quantify how far we are from exiting the negative interest rate policy.”

Market Reactions: Equity and Currency Fluctuations

Upon the announcement of the monetary policy decisions, the Japanese yen depreciated in the Tokyo foreign exchange market

Last year, the yen was one of the worst-performing major currencies globally, and this trend has continued into the new year, with a depreciation of more than 5% against the US dollar.

Market analysts like Shinichiro Kadota from Barclays forecast that the yen may slide further to 150 due to the Bank of Japan’s decision to keep its policy unchangedNonetheless, with expectations of a potential rate hike in April contrasted with anticipated cuts from other prominent central banks, including the Federal Reserve, it is projected that the USD/JPY pair may start to ease slightly in the spring.

In contrast to the yen's decline, the Japanese stock market has exhibited an upward trend since the start of the year

On January 23, after a brief rally, the Nikkei 225 index witnessed a slight downturn, ultimately closing with a decrease of 0.08%, while the Tokyo Stock Price Index dropped by 0.11%.

Nonetheless, foreign investors remain optimistic about Japan’s stock market performanceFidelity International asserts that Japan's economic transition towards moderate inflation presents enticing investment opportunitiesThe cultural shift from savings to spending among Japanese households is expected to yield profound and lasting economic effectsAmong various sectors, technology is regarded as having the most promising earnings outlook, followed by healthcare and communication servicesThe technology sector is poised for cyclical and structural advantages, with artificial intelligence anticipated to remain a long-term growth narrative.

Senior market strategist Huang Senwei recently remarked that Japanese listed companies are undertaking significant transformations, notably improving their Return on Equity (ROE) and showcasing unprecedented levels of stock buybacks