The Bank of Japan Denies Start of Tightening Cycle
The Bank of Japan has rejected the idea that its recent policy adjustment signals the beginning of a tightening cycle. Deputy Governor Shinichi Ichida clarified that the central bank’s flexible threshold for tolerance on long-term bond yields is merely a necessary modification to support its ultra-easy monetary policy position.
BOJ Loosens Yield Curve Control
Last Friday, the BOJ unexpectedly loosened its yield curve control, which some experts interpreted as the start of the end for the central bank’s ultra-easy monetary policy. The yield curve control, known as YCC, is a policy tool used to target longer-term interest rates.
“Needless to say, we do not have an exit from monetary easing in mind.”
– Shinichi Ichida, Deputy Governor, Bank of Japan
According to Ichida, the bank’s decision to conduct yield curve control with greater flexibility aims to continue with monetary easing while responding to both upside and downside risks in a highly uncertain economic environment. He emphasized that there is no intention to exit from monetary easing.
Speculation about an exit arose after the BOJ’s surprise decision to “flexibly” purchase 10-year Japanese government bonds at a 1% yield through fixed-rate operations. However, the central bank maintained its plan to allow yields to fluctuate within a range of approximately plus and minus 0.5 percentage points from its 0% target level.
BOJ’s 10-Year Bond Yield Hits Nine-Year High
Japan’s 10-year bond yield reached a fresh nine-year high of around 0.63% after the BOJ kept its purchase offer amounts unchanged in its fixed-rate operations. The yield curve control is part of the bank’s ultra-easy monetary policy, which also includes keeping short-term interest rates at -0.1%. Its goal is to stimulate growth in the third-largest economy and achieve a sustainable 2% inflation target after a period of deflation.
Ichida stated that Japan’s central bank still has a long way to go before considering a rise in short-term interest rates from the current -0.1% to 0%.
“Every policy has its positive effects, but it also always comes with costs. There is no free lunch for any policy.”
– Shinichi Ichida, Deputy Governor, Bank of Japan
Ichida emphasized the need to maintain ultra-easy monetary policy and low interest rates to support the emerging changes in firms’ wage and price-setting behavior. He acknowledged the difficulty of altering the cautious attitudes deeply ingrained in firms, even after the economy moved out of deflation. The central bank faces pressure to tighten its monetary policy due to consistently exceeding the 2% inflation target for 15 consecutive months, coupled with a recent increase in wages after years of stagnation.
This stance puts the BOJ at odds with the global trend of tightening monetary policy over the past year, driven by rising inflation following the pandemic-induced economic recovery. Ichida highlighted the importance of striking the right balance between the positive effects and side effects of policies as inflation expectations rise.