The Bank of Japan maintained its policy rate at 0.75% on Friday, aligning with market expectations, while simultaneously upgrading its medium- to long-term inflation forecasts, signaling a more optimistic assessment of price pressures. At the subsequent press conference, BOJ Governor Kazuo Ueda stated that underlying inflation will continue to rise moderately, and if economic conditions develop as anticipated, the central bank will proceed with further interest rate increases. Regarding the current rate decision, BOJ board members Hajime Takata and Naoki Tamura proposed modifying the wording of the outlook report, but their motion was voted down. Commenting on the impact of the previous rate hike, Ueda indicated that financial conditions have remained accommodative following the December increase, and it will take considerable time for the effects to broadly permeate the real economy and prices. He emphasized the bank's commitment to closely scrutinizing the varied impacts of past hikes on corporate and household activities, as well as the broader economy and price levels. On the subject of yen movements, Ueda declined to comment on specific foreign exchange levels, noting that currency values are determined by a multitude of factors, not solely by interest rate differentials. He acknowledged that a weak yen could elevate import costs, which may subsequently be passed on to domestic prices. He also pointed out that long-term interest rates are rising at a fairly rapid pace. The BOJ will conduct bond operations with flexibility in special circumstances and may undertake operations to encourage the formation of stable yields. The bank will remain mindful of the fact that supply and demand for ultra-long-term Japanese Government Bonds have been unstable due to factors related to the fiscal year-end. Regarding inflation, Ueda stated that one should not expect inflation to significantly exceed the bank's latest projections, and it is highly probable that the overall inflation rate will fall below the 2% target. As the underlying inflation rate approaches 2%, even minor foreign exchange fluctuations warrant attention. He pledged to work with the government to ensure thorough communication regarding the BOJ's stance on rate hikes and affirmed that core inflation will receive greater focus in policy decision-making. On the potential timing for future rate increases, Ueda said the bank is monitoring price changes in April, but this is just one factor in policy decisions. The BOJ will assess the impact of each hike on the economy and prices, which will determine the pace of future rate increases. He indicated that action need not necessarily wait for the final data on the effects of the December hike. Responding to questions about a potential sales tax cut proposed by the government, Ueda clarified that sales tax reductions are a matter for the government and parliament, and no formal decision has been made regarding a food tax cut. He stressed the critical importance of the government maintaining market confidence by committing to fiscal health and noted that the current policy outlook does not incorporate assumptions about a sales tax reduction. On the neutral interest rate, Ueda remarked that it is difficult to quantify. He also expressed the view that ultra-long-term yields are being destabilized by fiscal year-end factors. He stated that it is not yet the stage to consider whether the target will be achieved ahead of schedule, although board member Hajime Takata believes the target has already been met. Ueda declined to comment on today's yield movements, noting that some attribute recent yield shifts to fiscal concerns, but reaffirmed that achieving the price stability target remains paramount for the BOJ. During the press conference, the yen continued to weaken, with the USD/JPY pair breaching the 159 level for the first time since January 14th. Updates are ongoing.
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