By Max Sato
(MaceNews) – The Bank of Japan said Friday it is maintaining its super-low interest rate targets along the nearly flat yield curve and large-scale asset purchase program to support economic recovery and lead inflation toward its stable 2% target from relatively low levels, staying as a lone wolf while other major central banks are rushing to raise rates to tame inflation.
To keep speculative market forces from pushing the long-term bond yield beyond the its defense line, the bank will continue offering to buy 10-year Japanese government bonds at a fixed rate of 0.25 percent every business day through market operations “unless it is highly likely that no bids will be submitted.” The board decided to introduce this new market operation at its last meeting in April.
The bank has been guiding the 10-year JGB yield around zero to maximize the impact of monetary easing but it allows market rates to fluctuate between minus 0.25% to plus 0.25%.
The BOJ is keeping its stance of flexibly buying large amounts of Japanese government bonds, which is directly linked to its key policy tool of controlling long-term borrowing costs for businesses and households.
It is also maintaining the pace of its purchases of exchange-traded funds (ETFs) and Japan real estate investment trusts (J-REITs), which have supported domestic stock markets, and thus overall economic sentiment.
Japan Economy To Recover Despite Headwinds
The bank maintained its recent assessment that Japan’s economy “has picked up as a trend,” as stated in its quarterly Outlook Report issued after the April meeting.
“Japan’s economy is likely to recover, with the impact of Covid-19 and supply-side constraints waning and with support from an increase in external demand, accommodative financial conditions, and the government’s economic measures, although it is expected to be under downward pressure stemming from a rise in commodities prices due to factors such as the situation surrounding Ukraine,” it said, repeating its statement from the April report.
Looking ahead, the bank repeated its recent assessment that “there remain extremely high uncertainties for Japan’s economy” including developments in the pandemic, the Ukraine war and commodities prices.
“In this situation, it is necessary to pay due attention to developments in financial and foreign exchange markets and their impact on Japan’s economic activity and prices,” the bank said, without specifically mentioning the recent sharp depreciation of the yen.
BOJ Governor Haruhiko Kuroda has acknowledged that a rapid depreciation of the yen is not desirable as it generates uncertainty and makes it hard for companies to formulate business plans. Previously, when the yen’s fall against the dollar was more gradual, Kuroda had said the weak yen is positive to Japan’s overall economy.
BOJ policymakers regard the recent spike in the CPI annual rate to around 2% as temporary because it is largely caused by the fact that much of the base effects of steep mobile phone charge discounts launched in April 2021 has waned. In is April Outlook Report, the board projected inflation will average just under 2% in fiscal 2022 before slipping back to around 1% in the next fiscal year as the impact of surging commodities prices fades.
Easing Policy Stance Unchanged
Under the current framework, the BOJ is keeping the 10-year government bond yield, the benchmark for long-term borrowing costs, at around zero percent by buying “a necessary amount” of Japanese government bonds “without setting an upper limit,” and to keep the overnight interest rate at minus 0.1% by charging 0.1% interest on a part of cash reserves parked at the bank by financial institutions.
“For the time being, while closely monitoring the impact of COVID-19, the bank will support financing, mainly of firms, and maintain stability in financial markets, and will not hesitate to take additional easing measures if necessary; it also expects short- and long-term policy interest rates to remain at their present or lower levels,” the bank said, repeating its recent statement.
Reflationist board member Goushi Kataoka, a former private-sector economist, continued dissenting, arguing that it was “desirable to further strengthen monetary easing by lowering short-and long-term interest rates, with a view to encouraging firms to make active business fixed investment for the post Covid-19 era,” according to the BOJ.
The BOJ board decided unanimously to leave the main asset purchase guidelines unchanged.
“The bank will purchase exchange-traded funds (ETFs) and Japan real estate investment trusts (J-REITs) as necessary with upper limits of about 12 trillion yen and about 180 billion yen, respectively, on annual paces of increase in their amounts outstanding,” the BOJ said. It will also purchase CP (commercial paper) and corporate bonds at about the same pace as prior to the pandemic, so that their amounts outstanding will gradually return to pre-pandemic levels, namely, about 2 trillion yen for CP and about 3 trillion yen for corporate bonds.