Dhe Bank of Japan is resisting the pressure of the financial markets and is sticking to its expansive monetary policy despite the strong devaluation of the Japanese currency. The Japanese central bank is thus underscoring its role as an outsider at a time when other large central banks are raising their key interest rates out of fear of inflation or, like the European Central Bank, have announced that they will.
As the only concession to financial markets, the Bank of Japan included a rare reference to exchange rates in its monetary policy statement on Friday. After that, it is necessary to pay due attention to developments in the financial and foreign exchange markets and the consequences for the Japanese economy. The central bank kept the short-term key interest rate at minus 0.1 percent and did not change its purchase programs for government bonds and other securities.
As cheap as it hasn’t been for two decades
The Japanese yen fell sharply against the dollar and against the euro following the Bank of Japan decision, trading around 134 yen per dollar and 141 yen per euro. Earlier in the week, the yen was trading at more than 135 yen per dollar, the lowest since the 1998 Asian crisis. Central Bank Governor Haruhiko Kuroda then admitted that the pace of the devaluation was having a negative impact on Japanese companies. But he did not comment on the level. After the US Federal Reserve’s decision to raise interest rates by a rare 0.75 percent, the yen initially strengthened against the dollar.
The weak yen is helping Japanese exporters and Japanese corporations repatriating overseas profits to Japan. At the same time, however, imported goods are becoming more expensive, which is also driving inflation in Japan. This will primarily affect consumers and smaller companies. Kuroda’s comment a few days ago that Japanese consumers were tolerant of higher inflation caused so much public discontent that the central bank governor had to apologize. Most recently, the inflation rate in Japan was 2.5 percent. The central bank is looking at a different measure, which excludes fresh food prices. After that, inflation most recently reached 2.1 percent.
The Bank of Japan is targeting sustained inflation at around 2 percent over the medium term. According to the central bank, the current surge in inflation is temporary in nature. The central bank does not yet see any need to give up its expansive monetary policy. In its statement on Friday, the Bank of Japan also emphasized the extremely high level of uncertainty about the further development of the Japanese economy and referred to the Covid pandemic, developments in Ukraine and the development of commodity prices.
Meanwhile, bets are running on the financial markets as to how long the Japanese central bank can resist an interest rate turnaround while the other major central banks in the world are raising their key interest rates. A concrete change in monetary policy was not expected for this Friday. But there was speculation about the first signals that the central bank could correct its course. This is shown, among other things, by the fact that during this week the yield on Japanese government bonds with a term of ten years repeatedly exceeded the threshold of 0.25 percent, which the central bank set as the upper limit in its yield curve control policy. On the Friday before the monetary policy decision, the yield reached 0.265 percent, only to fall to around 0.22 percent thereafter.
This week the US Federal Reserve, the Swiss National Bank and the Bank of England raised their key interest rates. The European Central Bank had previously announced a rate hike for July.
