Bank of Japan Leaves Interest Rates Unchanged Amid Gloomy Outlook

(Bloomberg) -- The Bank of Japan stood pat on its massive easing program while taking a gloomier view of the current state of the economy amid rising virus cases and a widening state of emergency.

The BOJ left its interest rates and main asset purchases unchanged, according to a statement from the central bank Thursday. All 44 economists surveyed by Bloomberg forecast no change in the bank’s main policy levers ahead of a policy review in March.

The bank cut its growth forecast for the fiscal year ending in March, reflecting renewed concern over the pandemic. It said the economy was likely to follow an improving trend, projecting stronger growth in fiscal 2021.

Rising infection rates last week forced Prime Minister Yoshihide Suga to widen a state of emergency beyond the Tokyo region to include most of Japan’s other business hubs.

The BOJ has concentrated its efforts during the pandemic on ensuring businesses have access to cash and keeping markets stable. Its relative success so far and the prospect of a vaccine rollout over the coming months gave it enough breathing room to monitor developments for now, even with 60% of the economy subject to the reinstated emergency.

Still, the bank’s gloomier view of the country’s economic health, and its downside risks, adds to evidence the bank is a long way from the cautious optimism of some of its global peers. Some Federal Reserve officials see the possibility of a strong U.S. rebound once vaccines are widely delivered.

The gap in perceptions may help relieve some upward pressure on the yen. The currency hit a nine-month high against the dollar earlier this month, pushing Japanese exporters closer to loss-making levels when they are already facing lower demand amid the pandemic.

In its quarterly outlook report, the bank said the economy is picking up “as a trend.”

In the short-term, the BOJ forecast the economy will shrink 5.6% in the year through March, compared with its October forecast for a 5.5% contraction. After that the bank said it sees faster-than-earlier expected growth.

On inflation, the BOJ kept its projection that price growth is unlikely to meet the bank’s 2% target before early 2023.

The short-term outlook has darkened since Suga declared the renewed state of emergency in greater Tokyo earlier in the month and broadened it last week to include the economy’s biggest production hubs. Analysts now see Japan’s gross domestic product shrinking again this quarter, after a half-year rebound.

Following the decision to hold policy, BOJ watchers will shift their focus to any hints Governor Haruhiko Kuroda may give about a policy review in March. Kuroda has made clear he isn’t considering a major overhaul, but has flagged the buying of exchange-traded funds and the mechanics of its yield-curve management as areas needing consideration.

Kuroda is set to brief reporters at 3:30 p.m. in Tokyo.

(Adds growth forecasts.)