Careful Explanation Needed to Prevent Market Confusion

The Bank of Japan has decided to revise its monetary easing policy for the first time since Gov. Kazuo Ueda took office. However, it is difficult to understand the purpose of the move.

Ueda must make an effort to carefully disseminate information to prevent confusion in financial markets.

The BOJ is currently implementing monetary easing measures to guide the short-term interest rate to minus 0.1% and the long-term interest rate to around 0%. The central bank has allowed the yields of 10-year Japanese government bonds to fluctuate in the range of “around plus and minus 0.5 percentage points.”

The BOJ has now decided to control the fluctuation range with “greater flexibility,” stating it regards the upper and lower bounds of the range as “references,” allowing the yield to exceed 0.5%, depending on market situations.

If long-term yields exceed 1%, the BOJ is ready to take measures to hold down interest rates by purchasing an unlimited amount of JGBs, effectively setting a ceiling of 1%.

The BOJ’s monetary easing has been criticized for its many side effects, including the excessive depreciation of the yen. The BOJ’s flexibility in revising its policy is commendable.

However, there was turbulence in financial markets following the announcement of the policy revision. The Nikkei stock average saw significant fluctuation, temporarily experiencing its largest drop of the year, before rallying back sharply.

Ueda explained at a press conference that the policy revision is aimed at enhancing the continuity of monetary easing, saying, “If we delay our move, the side effects will be greater.” The central bank must do its best to maintain dialogue with the market.

Ueda, who took office in April this year, inherited the massive monetary easing policy from his predecessor Haruhiko Kuroda. Ueda acknowledged that there had been some side effects, such as worsening bank profits and distortions in the government bond market, and the new central bank governor hinted at the possibility of policy revision.

However, Ueda stressed his intention to continue the monetary easing policy because he thinks the current inflation is largely due to the effects of soaring prices of energy and other imports, and it has not been accompanied by wage increases.

The BOJ has set a price stability target of 2%. The central bank’s forecast for the inflation rate was revised upward to 2.5% for fiscal 2023, but at 1.9% for fiscal 2024 and 1.6% for fiscal 2025, indicating the bank does not expect inflation to reach the target level.

Although wage increases reached their highest level in 30 years in the latest spring labor-management negotiations, real wages, after adjusting for inflation, remain negative, and a virtuous cycle of wage hikes and price increases has not yet been achieved.

The BOJ must manage its policy while carefully analyzing trends in prices and wages.

(From The Yomiuri Shimbun, July 29, 2023)