The Bank of Japan on Friday dialled back emergency pandemic-funding but maintained ultra-loose policy and extended financial relief for small firms, cementing expectations it will remain among the most dovish central banks for the foreseeable future.
The BoJ's decision, underpinned by cautious optimism that the economic damage wrought by coronavirus crisis is gradually healing, came hours after Britain became the first G7 economy to hike interest rates since the onset of the pandemic.
The Federal Reserve and the European Central Bank also moved towards rolling back crisis-era stimulus, although at varying degrees reflecting their differing views – as well as uncertainty – on the surge in global inflation.
Fears over the recent rapid spread of the Omicron variant of coronavirus have also complicated the challenge for policymakers, whose monetary plans for a post-pandemic economic revival have been disturbed.
"The bigger picture is that in a week where the Fed signalled several rate hikes next year and the Norges Bank and the Bank of England raised interest rates, the BoJ sounded strikingly dovish," said Marcel Thieliant, senior Japan economist at Capital Economics.
"The upshot is that the Bank of Japan will remain among the few central banks that won’t tighten policy for the foreseeable future."
In a widely expected decision, the BoJ on Friday maintained its short-term rate target at -0.1 per cent and for 10-year bond yields around 0 per cent.
The BoJ also extended by six months a March 2022 deadline for its pandemic-relief loan scheme with tweaks to conditions, to ensure commercial banks keep channelling funds to small firms.
But it decided to slow purchases of corporate bonds and commercial paper to pre-pandemic levels from April, in a nod to sharp improvements in big firms' financial conditions.
"Financial conditions in Japan have improved on the whole, despite the continued significant impact of the Covid-19 pandemic on domestic and overseas economies," the BoJ said in a statement accompanying the decision.
The BoJ maintained its assessment Japan's economy was picking up as a trend, but cautioned that developments surrounding the pandemic and supply constraints have clouded the outlook.
That uncertainty, with Japan's consumer inflation stuck well below its 2 per cent target and the economic recovery still fragile, makes it a near certain bet that the BoJ will likely maintain easy monetary policy much longer than its major counterparts.
The fastest major central bank following in the footsteps of BoE could be the Fed, which said this week it would end its pandemic-era bond purchases in March and pave the way for three quarter-percentage-point rate hikes next year.