Japanese Central Bank's Surprise Monetary Policy Easing Boosts Yen to 4-Month High

[Asia Economy Reporter Lee Ji-eun] The Bank of Japan (BOJ), which had maintained large-scale monetary easing policies to stimulate the economy, decided to effectively raise interest rates by increasing the fluctuation range of long-term interest rates. Following the BOJ's decision, the dollar-yen exchange rate and stock market fell by more than 2%, sending shockwaves through the financial markets.

According to the Nihon Keizai Shimbun on the 20th, the BOJ concluded a two-day monetary policy meeting and announced plans to revise its accommodative monetary policy. On this day, the BOJ decided to change the fluctuation range of long-term interest rates from '0 to ±0.25%' to 'approximately ±0.5%'. The short-term interest rate was maintained at -0.1% as before. Nihon Keizai analyzed that since the upper limit of long-term interest rates rises to 0.5%, this effectively has the effect of raising interest rates.

Haruhiko Kuroda, Governor of the Bank of Japan
[Photo by Yonhap News]

Regarding the expansion of the long-term interest rate fluctuation range, the BOJ explained that "market functions have deteriorated, and the existing policy could negatively affect the financial environment, such as corporate financing," and that this decision was made to improve market functions. Since 2016, the BOJ has implemented the so-called Yield Curve Control (YCC) policy, purchasing government bonds without limit to keep Japan's 10-year government bond yields moving between 0% and 0.25%.

However, Nihon Keizai evaluated that this policy caused side effects such as expanding inflation and weakening the yen. As the U.S. Federal Reserve (Fed) raised its benchmark interest rate nine consecutive times since December last year, the interest rate gap between the U.S. and Japan widened, leading to strong yen selling pressure. In October, the dollar-yen exchange rate surpassed the psychological barrier of 150 yen, causing the yen's value to fall to its lowest level in 32 years.

Nevertheless, the BOJ did not completely shift its monetary policy toward tightening. It maintained the short-term interest rate at minus 0.1% and decided to continue purchasing index-linked exchange-traded funds (ETFs) to increase the money supply in the market.

The market was shocked by the BOJ's decision. After the announcement to expand the long-term interest rate fluctuation range, the yen's value reversed to an upward trend. As of 2:25 p.m., the dollar-yen exchange rate recorded 133.20, down 2.2% from the previous New York session, marking the highest level in four months. Japan's 10-year government bond yield rose from 0.25% to 0.43% following the BOJ's decision, and the Nikkei 225 index recorded 26,466.63 at 2:20 p.m., down 2.71% from the previous session.

Earlier, a Bloomberg survey of 47 economists showed that most respondents expected no significant policy changes in this monetary policy meeting.

Regarding the BOJ's decision, Nihon Keizai stated, "Since the BOJ had expressed a negative stance on revising accommodative monetary policy this year, this response is surprising," but also positively evaluated that "a partial revision of monetary policy could reduce the U.S.-Japan interest rate gap and help suppress a sharp rise in the exchange rate."

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