On January 23, the Bank of Japan (BOJ) concluded a two-day monetary policy meeting, deciding to maintain its ultra-loose monetary policyThis move aligns with market expectations as the short-term interest rates remain at a staggering -0.1%. The BOJ also reiterated its commitment to provide forward guidance on monetary policy, expressing readiness to enhance easing measures without hesitation if deemed necessary.

The BOJ has projected the core Consumer Price Index (CPI) for fiscal year 2024 at a median of 2.4%, a decline from 2.8% predicted in October of the previous yearMeanwhile, they also adjusted their economic forecasts by lowering the GDP growth expected for the fiscal year 2023 from 2% to 1.8%. Conversely, the GDP growth forecast for fiscal year 2024 was uplifted from 1.0% to 1.2%.

As the last major central bank to uphold negative interest rates in the world, the BOJ maintains that Japan's moderate economic recovery continues

Nevertheless, concerns linger over whether a virtuous cycle of rising wages and stable prices can be realizedThe central bank aims to support the economy with low-interest rates, intending to boost wage increases during the spring labor negotiations of 2024.

The Timeline for Ending Negative Rates

The BOJ's statement confirmed that deposit rates will remain unchanged at -0.1%, and the target yield for 10-year government bonds will stay around 0%, allowing for fluctuations of 1% in either direction, regarded as a reference pointAdditionally, the BOJ will purchase "necessary amounts of Japan's government bonds without setting an upper limit."

Japan's core CPI (excluding fresh foods) saw a slowdown in growth for the second consecutive month in December of last year, providing further support for the BOJ's decision to adopt a wait-and-see approach.

Moreover, several economists highlight that the impact of the Noto Peninsula earthquake on the economy, as well as Prime Minister Fumio Kishida being embroiled in a political scandal involving illicit funds, are influencing the BOJ's decision-making process.

On January 1, a 7.6 magnitude earthquake struck the Noto Peninsula in Ishikawa Prefecture, triggering a subsequent tsunami

• Broad-based Dominance, Affordable Accessibility
• Political Power Shifts Reshape Global Trade
• US Stocks Decline Further
• China A-Shares: Growth Prospects and Headwinds
• Fed to Raise Rates Again, Gold Soars

Major economic institutions in Japan estimate that the direct economic losses from this earthquake could exceed 800 billion yen, or approximately 0.15% of Japan's nominal GDPThe repercussions of this disaster are still ongoing.

In November of the previous year, a scandal involving illicit funds within the ruling Liberal Democratic Party (LDP) surfacedDifferent factions within the LDP allegedly set sales targets for their members of parliament, requiring them to sell political fundraising event ticketsIf members surpassed their targets, the extra funds would reportedly be returned to them in the form of "kickbacks,” effectively creating unregulated secret funds.

According to Xinhua News Agency, the fallout from the LDP's scandal led Prime Minister Kishida to announce the dissolution of the "Kishida Faction," which he had long led

On the same day, the two largest factions, the Abe and Nikai factions, also resolved to disbandTogether, these three factions account for 182 members of parliament, nearly half of all LDP parliamentarians.

Currently, the market is keenly observing when Japan will withdraw from its negative interest rate policy.

Some economists suggest that the end of March, following the spring labor negotiations, could represent a conducive moment for such a shiftFollowing significant wage increases in 2023, large employers in Japan are expected to embark on another cycle of raises in 2024, a move anticipated to stimulate household spending and create the necessary conditions for the BOJ to finally taper extensive monetary stimulus.

According to Kyodo News, there is a general consensus within the BOJ that, given robust corporate performance and increasing labor shortages, many large companies will decide to implement considerable wage hikes during the 2024 spring negotiations

However, opinions vary, and some stress the need to monitor the responses from major corporations and the subsequent effects on small and medium enterprises.

Most analysts anticipate that the BOJ will maintain its expansive easing policies during the current meeting, yet may relieve negative interest rates in March or April.

UBS forecasts that the BOJ will raise the policy rate from the current -0.1% to 0.0% in April, likely abandoning the Yield Curve Control (YCC) policy simultaneouslyWhile an adjustment may happen in March, it is perceived more prudent to defer any action until April, given the timing proximity to the announcement of the spring wage negotiations by Japan’s labor associations, along with overly optimistic views concerning the US economy and the potential for a significant drop in consumption in Japan during the first quarter.

Bank of Japan Governor Kazuo Ueda did not offer the market clear guidance during the January 23 press conference

He highlighted, “As we assess the imminent achievement of our 2% inflation target, we shall review whether to continue implementing large-scale monetary easing measures, including the negative interest rate policyIt is currently impossible to quantify the distance to withdrawal from negative rates.”

Market Responses in the Stock and Foreign Exchange Sectors

Following the announcement of its monetary policy, the yen weakened in Tokyo's foreign exchange marketLast year, the yen was among the poorest-performing major currencies worldwide, a trend that has carried over into the new yearIn 2023, the yen fell against the US dollar by more than 5% at one point.

Shinichiro Kadota, a forex strategist at Barclays, predicts the yen may drop to 150 following the BOJ's decision to uphold their current policy

However, as the BOJ is likely to raise rates in April while other major central banks, including the Federal Reserve, may begin to cut rates, a slight decline in the dollar-yen exchange rate is expected to commence in spring.

Contrasting with the yen's performance, Japan's stock market has been on an upward trajectory since the start of the yearOn January 23, although the index surged initially, it closed marginally lower, with the Nikkei 225 average dropping by 0.08%, while the Tokyo Stock Exchange Price index slid 0.11%.

Currently, foreign capital remains optimistic about Japan's stock market performance.

Fidelity International suggests that Japan's shift towards moderate inflation presents investment opportunities

The change in Japanese household attitudes from saving to consumption is expected to deliver widespread and lasting benefits to the economyFrom a sectoral perspective, the technology sector appears to have the most attractive earnings outlook, closely followed by healthcare and communication servicesThey believe that the technology sector possesses both cyclical and structural advantages, with artificial intelligence emerging as a long-term growth narrative within this field.

Eddie Huang, a senior market strategist at Invesco, recently stated in an interview that Japanese listed companies are effecting significant changes and are now substantially enhancing their shareholder equity (ROE). Stock buybacks have reached historical highs, a trend likely to favor future stock performance