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Japan: BoJ Remains Accommodative As Growth and Inflation Remain Subpar

On July 21, the Bank of Japan (BoJ) held rates steady and maintained its policy stance on Quantitative and Qualitative Monetary Easing (QQE) with Yield Curve Control (YCC). The policy appears appropriate given the demand deficiency and limited inflationary pressures Japan is currently experiencing. Nonetheless, the rising interest rate differential between the BoJ and other global central banks has caused the Japanese yen to weaken significantly to the lowest point in 25 years with the USD/JPY trading at 139. The BoJ has historically maintained that a weak yen is positive for the export sector, but in its July 21 announcement, it noted the need to pay attention to the impact of foreign exchange markets on Japan's economic activity and prices. In our view, modestly higher inflation could ultimately be positive for Japan's ratings (A high), but continued exchange rate weakness may compress corporate profitability and dampen consumption growth.


• Unlike most other central banks which are hiking rates to counter inflation, the Bank of Japan (BoJ) has not initiated a tightening cycle.

• The policy appears appropriate given the demand deficiency and weak inflationary pressures Japan is currently experiencing.

• Rising interest differentials between the BoJ and other central banks has caused the yen to weaken, with rising import costs compressing corporate margins and dampening consumption.

“BoJ remains an outlier on the rate tightening cycle due to Japan’s weak growth and benign inflation, but the divergence in global rates is driving the yen weaker,” says Rohini Malkani, Senior Vice President DBRS Morningstar. “Given Japan’s weak growth outlook, the income effects of rising import costs due to yen depreciation are compressing corporate margins and could dampen consumption growth, adding to the BoJ’s challenges”.