Bank of Japan "No Change to Monetary Easing Policy... Low Interest Rates to Continue"

While Countries Worldwide Raise Interest Rates... Maintaining Low Rates Alone
"Continuing Financial Easing Policies for Wage Growth and Consumption Expansion"

Kuroda Haruhiko, Governor of the Bank of Japan, is commuting to the office building in Tokyo on January 19. [Image source=Yonhap News]

[Asia Economy Reporter Minwoo Lee] While countries around the world, including the United States, are raising interest rates, the Bank of Japan has decided to continue its 'solo' low-interest-rate policy.

On the 17th, the Bank of Japan held a Policy Board and Monetary Policy Meeting and decided to keep the short-term interest rate at -0.1%. It also decided to maintain large-scale monetary easing by purchasing long-term government bonds without an upper limit to guide the 10-year government bond yield, a long-term interest rate indicator, to around 0%. This means maintaining the policies identified as the background for the recent sharp decline in the yen's value.

While other countries have already raised interest rates, Japan's unique 'solo' low-interest-rate policy is expected to continue the yen's weakness. Earlier, the U.S. Federal Reserve (Fed) raised the benchmark interest rate by 0.75 percentage points (p) after concluding the Federal Open Market Committee (FOMC) regular meeting on the 15th (local time). The European Central Bank (ECB) also raised rates by 0.25%p in July and recently announced plans to raise them again in September.

Immediately after the Bank of Japan's decision on this day, the yen fell to 134.53 yen per dollar. On the 13th, it had dropped to 135.6 yen per dollar, the lowest level in 24 years. Bank of Japan Governor Haruhiko Kuroda said at a press conference that "a rapid depreciation of the yen negatively affects the economy by making it difficult for companies to plan their business, which is undesirable," but added, "We will not operate policy targeting the exchange rate, and price stability is the goal of monetary policy."

Analysts suggest that the Bank of Japan's adherence to monetary easing is due to low inflation rates and the burden of government bond interest payments. Japan's consumer prices rose 2.1% in April due to yen weakness and rising prices of grains and raw materials. Although this is the highest increase in 7 years and 1 month since March 2015 (2.2%), it is far below the average of 9.2% among OECD countries in the same month.

The Bank of Japan aims to increase investment and improve exports through monetary easing and yen depreciation. Through this, it expects a virtuous cycle of wage increases and expanded consumption leading to higher inflation. Although the April consumer price inflation rate reached the target range of 2%, it is judged to be due to external factors, so the monetary easing policy will be maintained. Governor Kuroda said, "We will persistently continue monetary easing to sustain wage increases."

The burden of government bond interest payments is also a cause. The Bank of Japan announced at the meeting that it will maintain the upper limit of the allowable fluctuation range for the 10-year government bond yield at 0.25%. When asked whether the upper limit would be raised, Governor Kuroda replied, "That would weaken the effect of monetary easing." If long-term interest rates rise, the interest repayment burden on 10-year government bonds, which make up most of Japan's government debt, will increase sharply. According to the Japanese Ministry of Finance, Japan's government bond balance exceeded 1,000 trillion yen (about 9,700 trillion won) as of the end of last year. If the Bank of Japan raises interest rates by 1%p, the government's annual principal and interest burden will increase by 3.7 trillion yen.

This content was produced with the assistance of AI translation services.