The Japanese Central Bank continued to distance itself from the policies of the Federal Reserve and most central banks around the world, as the interest rate on the Japanese yen was fixed at its meeting today, Friday, maintaining its accommodative policies, but it announced steps that brought Japanese bond yields to levels not seen in years.
The bank fixed the short-term interest rate at 0.1%, and the 10-year government bond yield at 0%, except that it announced an offer to buy 10-year Japanese government bonds at 1% in fixed-interest operations, instead of the previous rate of 0.5%. , in a clear indication that the bank is accepting more monetary tightening.
With this rare offer, the central bank allowed the yield on 10-year Japanese government bonds to rise to the highest level in almost nine years. BoJ Governor Kazuo Ueda said it gives the market more freedom to push yields higher.
Despite the changes in its monetary policy, Ueda said the bank has not yet abandoned the ultra-easy monetary policy pursued by its predecessor Kuroda. Kuroda’s policies included a short-term negative interest rate on a wide range of government bonds, with the aim of keeping the 10-year bond yield at a low level.
On Friday, the bank said the existing 0.5% cap was a proposed cap, not a strict limit, adding that it had set a new strict cap at 1%. Shortly after, the yield on 10-year government bonds reached 0.575%, the highest level since September 2014, before falling back to 0.54%.
On the other hand, the Bank of Japan raised its inflation forecast to 2.5% from 1.8%.
The Bank of Japan is still sticking to its stimulus policies, waiting for more sustainable signs of inflation to emerge in the country.
This policy differs radically from the policies of the US Federal Reserve, which raised interest rates 11 times since last year, with a total value of 5.25%, as well as the European Central Bank, which raised interest rates yesterday, Thursday, for the ninth time in a row, to reach the highest level in 22 years.
Japan is currently the only country in the world with negative interest rates, but rising inflation this year pressured the Bank of Japan to scrap its seven-year policy of yield-lowering bond-buying, known as “yield curve control”.
Interest rate movements in Japan affect US markets, because Japanese financial institutions are the largest investor in US government and corporate bonds at the moment. Higher interest rates in Japan could lead to some institutions returning their funds to Japan, which would affect US bond markets, and could push the dollar lower against the yen.
Ueda said the new policy aims to improve monetary easing. He added that he did not believe the new 1% limit would be reached, describing it as a “reserve maximum”.
The Bank of Japan seeks to improve the sustainability of monetary easing, and to raise the maximum interest rate to 1% to combat inflation, which has remained high above 3%, exceeding the bank’s target of 2%. The bank raised its inflation forecast for the current fiscal year, acknowledging that its previous forecasts did not match the strength of rising prices in Japan.
The BoJ believes that the increased flexibility in monetary easing could help counteract inflation if it continues to exceed expectations. This approach is a bit dovish, but it reflects the bank’s growing concern about inflation.
Media quoted major players in the market as saying that Ueda’s preparations to raise interest rates, and the bank’s indications of inflation risks, indicate the possibility of taking more steps during the next year, such as ending short-term negative rates, or canceling the bond yield ceiling.
2023-07-28 20:41:56
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