TOKYO (BLOOMBERG) – The Bank of Japan left its monetary stimulus unchanged on Thursday (Sept 19) and called for a re-examination of prices and the economy at its October meeting, choosing to sit tight for now just hours after the Federal Reserve cut interest rates again.

The BOJ said it needed to pay closer attention to the possibility of losing momentum toward its 2% inflation target as overseas economies continue to decelerate. Slowing global growth has already prompted major central banks such as the Fed and the European Central Bank to cut rates, a wave of easing that the BOJ has so far resisted.

About three quarters of economists surveyed by Bloomberg had predicted the BOJ would leave its interest rates and asset purchases at existing levels at the September meeting, with an improvement in market sentiment relieving some of the urgency to act.

Still, almost half the polled economists expected the central bank to ease policy either this month or in October. The call for a review is likely to heighten expectations that the BOJ will take additional action then.

“Given that the outlook is very uncertain, the BOJ will review its policy with more easing in mind. As Kuroda has said, a deeper negative rate is an option, but that will certainly draw criticism from financial institutions,” said Takeshi Minami, chief economist at Norinchukin Research Institute.

In 2016, the BOJ called for a comprehensive assessment of policy as inflation fell below zero, bank stocks plunged and the yen strengthened after it introduced its negative interest rate earlier in the year. The review resulted in a large-scale revamping of its easing program to focus on short- and long-term interest rates.

The latest review will likely generate speculation of more tweaks to its policy framework in addition to further easing moves.

“It’s too early to say further easing is a done deal at the October meeting. The BOJ is just saying that it will review the economy and inflation so it’s not a commitment to take action,” said Chotaro Morita, chief rates strategist at SMBC Nikko Securities in Tokyo. The BOJ had to be seen doing something after the Fed cut rates, he added.

BOJ DILEMMA

The BOJ’s decision comes as global central banks move to support economic growth and head off rising risks. Those moves have raised expectations that the BOJ might follow suit, partly to prevent a stronger yen from hampering its efforts to stoke inflation. The European Central Bank last week cut rates and revived bond purchases.

Yet many BOJ watchers also see the central bank’s firepower as depleted, while side effects from its stimulus program are piling up. So a reversal in the yen in recent weeks likely helped give Governor Haruhiko Kuroda room to hold off acting for at least a while longer.

The yen strengthened to 107.80 as of 12:56pm in Tokyo on Thursday after the BOJ’s decision. It touched 104.46 last month, the strongest level since November 2016. Economists generally see a move to 100 as a trigger for the central bank to cut its negative rate.

Another headache for the BOJ’s policy operation has eased for now. Japan’s 10-year government bond yield is trading within BOJ’s target range after touching a three-year low of -0.295 per cent, a level some BOJ officials said was close to requiring action, according to people familiar with the matter.

Still, fundamental challenges remain. Inflation stood at 0.6 per cent in July, far from the BOJ’s 2 per cent target. Exports have declined every month this year. And a sales tax hike taking effect next month is expected to hit domestic demand, which has helped sustain growth during the export slump.

In fact, an increasing number of economists – 83 per cent in the latest Bloomberg survey – say the next policy step will be additional stimulus.

Kuroda holds a press conference starting at 3:30pm.