This summer, when the Federal Reserve began raising interest rates to fight inflation, almost every central bank around the world raced to keep up. The Bank of Japan alone stood firm.
But Tuesday, the central bank of the world’s third-largest economy seemed to have a sudden change of heart, signaling that it could begin moving away from years of ultra loose policies aimed at spurring wages and prices higher.
The bank said it would loosen the tight limits it had imposed on bond yields, a move that could crack open the door for future interest rate increases. The change surprised investors in Asia who had been expecting the bank to make such a decision next year.
In a policy statement, the Bank of Japan said it would allow the yield on its 10-year bonds to move in a range of plus-or-minus 0.5%, broadening the band from 0.25%, as it seeks to promote trading of domestic bonds, which has stagnated. At the same time, the bank will increase its monthly bond purchases to $67 billion from around $55 billion, the statement said.
Analysts had predicted that Japan’s central bank would hold fast to its current monetary settings through at least the spring, when its current governor, Haruhiko Kuroda, will step down.
“The consensus was entirely that the BOJ would stand pat,” said Stefan Angrick, a senior economist at Moody’s Analytics.
In its statement, the bank said it had made the change in light of deteriorating bond market conditions caused, in part, by “volatility in overseas financial and capital markets.”
For years, the Bank of Japan has limited yields to a tight range to keep interest rates low, a policy it has incrementally loosened since its introduction in 2016. But in recent months the restrictions, maintained with enormous buying operations, had brought the trading of some government bonds to a near standstill.
The bank said its new policy change would help support the ultralow rates that had for years provided households and businesses with a steady flow of cheap money. One of the pillars of that policy — near-zero interest rates — will remain unchanged, the bank said in its statement.
In a news briefing after the statement’s release, Kuroda said it was “too early to consider reviewing or exiting” its current easing policies.
Japan has felt the sting of skyrocketing food and energy prices because of supply chain snarls and the war in Ukraine. Inflation, while much lower than in other parts of the world, was at 3.6% in October, putting a substantial burden on households that became accustomed to decades of price stability and wage stagnation.
Making matters worse is a weak Japanese yen. Earlier this year, the currency traded at a decadeslong low against the dollar, placing even more price pressure on the economy, which is heavily dependent on imports.
The yen’s weakness has been exacerbated by the Bank of Japan’s insistence on sticking to ultralow interest rates even as other central banks have precipitously raised their own in an effort to tamp down runaway inflation. The gap has put pressure on the yen as investors move money out of Japan in search of higher returns.
The currency has regained lost ground in recent weeks as other central banks have slowed their interest rate increases. It jumped in value after Tuesday’s announcement, by more than 3%. A surge in the currency’s value could help reduce inflationary pressures on the economy.
Kuroda has said he would stick to the bank’s current rate policy until the bank achieved sustainable, demand-driven inflation of 2%, a level that policymakers argue would create a virtuous cycle of growing corporate profit and wages. While current levels have exceeded that target, the bank argues that the price increases are largely driven by supply constraints, not the heightened demand it aims to create.
In its statement, the bank said it would maintain its current inflation target until it could be maintained in a “stable manner,” adding that it would “not hesitate to take additional easing measures, if necessary.”
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