Bank of Japan signals less dovish stance amid policy shift

Bank of Japan in focus: The Bank of Japan (BOJ) has adopted a more "data-dependent" approach to its policy decisions following the cessation of negative interest rates, potentially paving the way for another near-term hike in borrowing costs, sources told Reuters.

Last week, the BOJ made a historic shift away from its ultra-loose monetary policy after eight years of negative rates. 

However, despite the rate hike, the yen has depreciated over 1 per cent since the policy pivot, reflecting markets' interpretation of the BOJ's communication as dovish.

Upon closer examination, the BOJ's recent statement indicates a departure from its previous assertive forward guidance. 

The bank has refrained from committing to keeping interest rates low, instead suggesting that borrowing costs could remain low if economic and price conditions remain stable.

BOJ Governor Kazuo Ueda stressed that the timing of future rate hikes would be contingent on data, aligning the bank's communication approach with other major central banks like the Federal Reserve.

The upcoming quarterly growth and inflation forecasts, scheduled for release at the BOJ's next policy meeting in April, will provide crucial insights into policymakers' outlook for inflation and the likelihood of further rate hikes.

While most economists don't anticipate rate hikes until the fourth quarter, some analysts speculate that a weak yen could prompt the BOJ to act sooner to mitigate potential inflationary pressures.

Amid ongoing economic developments, there is a growing anticipation among market observers for potential policy actions as early as July, particularly if there are signs of inflation overshooting or major wage hikes impacting smaller firms.

Overall, the BOJ's shift in communication underscores a nuanced approach to monetary policy, stressing flexibility and responsiveness to evolving economic conditions.

(With Reuters Inputs)