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Extremely accommodative monetary policy: Japan’s central bank does everything differently

Extremely loose monetary policy
Japan’s central bank does everything differently

The Bank of Japan is opposing the trend of restrictive monetary policy and wants to keep borrowing costs at “current or lower” levels. Although the yen fell sharply, one would be careful not to repeat the old mistakes with hasty interest rate hikes.

Unlike their counterparts in the US, the euro zone and the UK, Japanese central bankers stick to their extremely accommodative monetary policy. Borrowing costs need to be kept at “current or lower” levels, the central bank announced after its two-day meeting in Tokyo. He wants to continue to keep short-term interest rates at minus 0.1 percent and ten-year government bond yields at around zero percent.

Due to the sharp decline in the value of the national currency, the yen, it was also stressed that the effects of price movements on the economy should be “closely monitored”. “The recent rapid decline in the yen is increasing uncertainty about the outlook and making it difficult for companies to formulate business plans,” said central bank governor Haruhiko Kuroda. “It is therefore bad for the economy and undesirable.”

Lower risk of inflation in Japan

The yen slipped to 1.7% against the dollar following the interest rate decision. The widening political divergence between Japan and the rest of the world has pushed the currency to a 24-year low. This threatens to stifle consumption as already rising import costs are likely to continue to rise with the weak currency.

The reason for the yen’s weakness is that other large central banks, such as the US Fed, aggressively raised their key interest rates in the fight against high inflation, or at least signaled that they would. This makes the yen less attractive to investors. “Inflation risk is very different in Japan as it is not structural and is much lower than in the US or Europe,” said John Vail, analyst at Nikko Asset Management. “There is therefore less need for higher interest rates or bond yields.” Furthermore, the central bank is very careful not to be accused of repeating the mistake of 2007: raising interest rates in the face of a global recession.

The central bank is in a dilemma. As the inflation rate in Japan is currently around two percent lower than in Western economies, it is focusing on supporting the economy, which is still weak due to the krona pandemic, with low interest rates. This triggered the yen’s fall, hurting an economy heavily dependent on fuel and imported commodities. On the other hand, the weakness of the currency is helping Japanese exporters, who are consequently becoming more competitive in terms of price. “It is important that companies benefiting from the weak yen increase their investments and wages,” said central bank governor Kuroda.

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