BOJ Policy Readjustment: Central Bank Needs to Nimbly Respond to Changes

The Bank of Japan has decided to readjust its monetary easing measures. With the adverse effects of the weaker yen and higher prices being prolonged, it is important for the central bank to be nimble in its policy management.

The BOJ has continued its monetary easing to guide short-term interest rates to minus 0.1% and long-term interest rates to around 0%. Regarding the fluctuation in long-term interest rates, the central bank had previously set an effective upper bound of 1.0% and defined a range of around plus and minus 0.5 percentage points as a reference.

If long-term interest rates exceeded 1%, the central bank previously would purchase an unlimited amount of Japanese government bonds to hold down rates. From this point forward, however, it will be more flexible regarding the rate level at which JGBs are bought to allow rates to rise above 1% to a certain extent.

The central bank said it will maintain the general framework of monetary easing measures, including the negative interest rate policy.

The yen has been weakening as the U.S. Federal Reserve rapidly raised interest rates, with the rate differential between the United States and Japan widening. It is appropriate that the BOJ has now further adjusted its policy, following its July hike in the long-term interest rate ceiling from around 0.5% to effectively 1%.

The hikes in U.S. interest rates temporarily drove the yield on the 10-year U.S. Treasury bond above 5% in October. This also impacted the benchmark JGB yield, pushing it close to 1%. Even so, the yen’s depreciation has accelerated to the ¥150 range against the dollar.

If the BOJ had not adjusted its policy this time, the yen could have weakened even further.

BOJ Gov. Kazuo Ueda stated at a press conference that the central bank would be more flexible in its policy management because holding down long-term interest rates would have greater side effects.

However, if long-term interest rates rise, fixed-rate housing mortgages and corporate borrowing rates will rise. Ueda needs to explain the aims and effects of the policy in an easy-to-understand manner while paying careful attention to adverse effects.

From now on, attention will focus on the timing of when the negative interest rate policy will end, which would mark a major shift in monetary easing policy.

The BOJ has set a price stability target of 2% inflation. The central bank’s new forecasts for the inflation rate have been revised upward to 2.8% in fiscal 2023 and 2.8% in fiscal 2024. Both exceed this target.

The central bank has not changed its stance that it does not foresee the realization of a virtuous cycle of wage hikes pushing up prices, mainly because of the rise in energy prices and other import prices.

On the other hand, the Japanese Trade Union Confederation (Rengo) intends to accelerate its efforts for wage hikes by calling for a wage increase of 5% or more in the next shunto spring labor wage negotiations. Many companies are positive about raising wages due to labor shortages.

Expectations are mounting in the market for a change in BOJ policy around next spring. The central bank should also thoroughly disseminate information regarding the outlook for its policy management.

(From The Yomiuri Shimbun, Nov. 1, 2023)