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It is important for the Bank of Japan to shift from its extraordinary monetary easing policy to a normalized policy. The BOJ should carefully make a plan for this so as not to destabilize the market.
The BOJ currently purchases about ¥6 trillion of Japanese government bonds per month. However, at the Monetary Policy Meeting on Friday, the central bank decided to reduce this purchase amount. The BOJ has decided to formulate a specific plan for reducing the amount of purchases over the next one or two years at its next meeting in July.
In March this year, the BOJ ended its large-scale monetary easing policy and lifted its negative interest rate policy. This time, the BOJ is also shifting its policy to “quantitative tightening” by gradually reducing its government bond holdings, a move to progress its policy toward normalization.
For the government bond market to function soundly, it is desirable for private financial institutions and others to be the main purchasers of JGBs. It is appropriate for the BOJ to reduce its amount of government bond purchases.
After the BOJ’s policy change, long-term interest rates rose to 1.1% in May, the highest level in about 13 years.
Immediately after the latest meeting, the yen depreciated to ¥158 to the dollar. If the BOJ’s plan to reduce the amount of government bond purchases to a reasonable size takes shape, it may have the effect of curbing excessive yen depreciation and dollar appreciation to some extent.
The central bank began its quantitative easing policy in 2001 as an economic stimulus measure and lifted it in 2006, but later, it took steps again to supply funds to the market by buying government bonds, significantly increasing the amount of purchases in 2013.
The BOJ’s outstanding government bond holdings now total nearly ¥600 trillion, accounting for more than 50% of total government bonds issued. While this has had the effect of holding down long-term interest rates, it has also been argued that it has weakened the nation’s fiscal discipline. It will take time to reduce the holdings to an appropriate level.
The BOJ left the policy rate unchanged at around 0% to 0.1% this time, judging that it is necessary to keep interest rates low to support the economy in order to achieve the price stability target of a 2% increase in the consumer price index.
Meanwhile, the U.S. Federal Reserve Board kept its policy rate at a high level of 5.25% to 5.50% for a seventh consecutive meeting and reduced its forecast for the number of rate cuts until the end of the year from three to one. The difference in interest rates between Japan and the United States remains large, and the pressure on the yen to weaken remains strong.
In the Japanese economy, wage increases have not been able to keep pace with inflation, and inflation-adjusted real wages have been declining for more than two years. If the weak yen pushes up prices by causing the cost of imports to rise, there is a risk of consumption declining further.
BOJ Gov. Kazuo Ueda emphasized, “The recent depreciation of the yen is an upward factor for prices.” The central bank should manage its policies with attention to the foreign exchange market as well.
