The Bank of Japan refrained from offering additional monetary stimulus on Thursday despite anemic inflation and weak global growth, sending the yen spiking to a two-year high that clouds an already darkening outlook for the economy.
While the decision came as no big surprise, it emboldened yen bulls who were already selling the dollar after the Federal Reserve held off on raising interest rates on Wednesday and grew more cautious about prospects for U.S. growth.
BOJ Governor Haruhiko Kuroda joined a chorus of jawboning by Japanese policymakers aimed at dissuading investors from pushing up the yen too much, stressing his readiness to ease policy again if excessive yen gains threaten prospects for achieving the bank’s ambitious 2 percent inflation target.
He also said the BOJ is in close contact with other central banks, including the Bank of England, on contingency plans to soothe financial markets should Britain vote to leave the European Union at next week’s referendum.
With polls showing the “Leave” camp pushing ahead, few had expected the BOJ to risk easing policy before the June 23 vote.
“If events like a Brexit vote disrupt dollar procurement of Japanese or any other countries’ banks, we have ample tools available to deal with it,” Kuroda told a news conference.
The BOJ maintained its massive asset buying program at its two-day rate review that ended on Thursday, pledging to increase base money at an annual pace of 80 trillion yen ($753 billion).
It also left unchanged a controversial 0.1 percent negative interest rate applied to some of the excess reserves financial institutions park with the central bank.
“There is nothing in recent economic indicators that would lead the BOJ to change its economic outlook now,” said Norio Miyagawa, senior economist at Mizuho Securities.
“However, the rising yen will place more downward pressure on consumer prices, so I expect the BOJ to ease in July, using all three dimensions of its current policy framework,” referring to the options of buying more bonds, taking on more risk by topping up other asset purchases and deepening negative rates.
The yen surged broadly after the BOJ’s decision, hitting a 22-month high of 104.06 yen to the dollar and multi-year highs against the euro and sterling. The Nikkei stock average lost 3.1 percent to close at a four-month low.
A Brexit may push up the yen further as investors buy the currency as a safe haven. That adds to headaches for Japanese policymakers, who fret of the hit to exports already suffering from soft global demand.
A strong yen also weighs on inflation by pushing down import costs. Core consumer prices fell for the second straight month in April as weak consumption discouraged firms from raising prices, stoking fears Japan was reverting to deflation.
“Yen rises, as we’re seeing now, could have undesirable effects on Japan’s economy and future inflation,” Kuroda said, issuing his strongest warning to date of the damage recent yen gains could have on the economy.