Tokyo/Berlin (Reuters) – Japan’s central bank is sticking to its very loose monetary policy, bucking the global trend of rising interest rates.
The currency watchdogs in Tokyo decided on Friday to continue the controversial course of yield curve control, which is known in technical jargon as yield curve control (YCC). They are aiming for targets of minus 0.1 percent for short-term interest rates and zero percent for the yield on ten-year government bonds. The head of the Bank of Japan (BoJ), Kazuo Ueda, made it clear that he sees no urgent need for change. The side effects of this loose monetary policy have even lessened recently. But he left the door open for a change of course in the future: “We decide policy by carefully weighing the benefits and costs of each measure.”
The central bank is flanking its low interest rate policy with the purchase of government bonds and riskier assets such as ETFs. Critics accuse the central bank of undermining market liquidity with the YCC and amplifying the unwanted fall in the yen. The BoJ justifies its loose stance with the intention to support the economy and bring inflation to a desired level on a sustainable basis. An important prerequisite for an orderly departure from the YCC policy is that wages rise sharply enough to keep inflation around the central bank’s two percent target. Ueda explained that from the central bank’s point of view, inflation has not yet stabilized sustainably, even though the inflation rate has been above the central bank’s target for 13 consecutive months. It is still possible that it will fall below the target mark in the future.
“BOJ KEEPS PLAYING FOR TIME”
“The very cautious comments by the head of the central bank on the inflation environment in Japan immediately put some pressure on the yen,” explained NordLB analyst Tobias Basse. The foreign exchange market senses that the BoJ wants to continue playing for time, especially when it comes to conceivable adjustments to the traditional key interest rate level: “In view of the current price data, however, an end to the yield curve control measures remains possible fourth quarter of 2023,” added the expert.
Higher traditional key interest rates are only to be expected after the monetary policy review process in Tokyo has been completed, said Basse. The BoJ has initiated such a review of its years of ultra-loose monetary policy. But this should take a year to a year and a half. On the other hand, many major central banks around the world have long been on course to raise interest rates: the US Federal Reserve recently paused after ten increases in a row. However, she is keeping the option of further steps upwards open. At the European Central Bank and the Bank of England, given the high level of inflation, the signs also point to interest rate hikes.
(Report by Leika Kihara and Tetsushi Kajimoto, written by Reinhard Becker. If you have any questions, please contact our editorial team at [email protected] (for politics and economics) or [email protected] (for companies and markets ).)