EDITORIAL | Bank of Japan Must Brace for Side Effects of Prolonged Monetary Easing

The Bank of Japan made changes to its core policy of large-scale monetary easing in a meeting on Friday, July 28. Among the changes, the BoJ is introducing a more flexible approach to managing long-term interest rates. While maintaining the current upper limit of around 0.5% for long-term interest rates, this revision allows rates to rise beyond that level, up to 1%.

Previously, BoJ bought a significant amount of government bonds from the market to artificially suppress long-term interest rates. That practice led to concerns about the market's ability to determine appropriate interest rate levels. In this revision, the goal is to mitigate potential side effects.

However, wage increases sufficient to cope with rising prices have not yet been achieved. Hereafter, BoJ must persist in implementing its easing measures and be prepared to address any potential side effects.

BoJ Governor's Practical Intentions

This decision appears intended as a practical step towards achieving sustainable and stable inflation with significant wage growth. On the other hand, the modification seems rather complex. 

The overall framework of the easing policy, guiding interest rates to around 0%, remains intact. However, the existing upper limit of approximately 0.5% is maintained to allow for slight fluctuations, while the new revision permits an increase of up to 1%, making monetary policy overly intricate.

Governor Kazuo Ueda assumed office in April. Under his leadership, the Bank of Japan is emphasizing more meticulous information dissemination.

As a result of this decision, there is potential for interest rates, which have remained below the 0.5% upper limit, to increase. Among other things, this would impact yields on corporate loans and housing mortgages. 

Additionally, the BoJ must carefully monitor the impact this may have on the ongoing economic recovery.

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In the future, the new policy says BoJ will treat 0.5% as a "target," aiming to let the market have more influence on the formation of long-term interest rates. Governor Ueda clarified that the Bank of Japan does not expect interest rates to rise up to 1%. Rather, he indicated, the cap of 1% was set as a precautionary measure. 

Moving Forward Warily

Interest rate increases can be triggered not only by economic activities and price trends but also by speculative attacks from investors. The Bank of Japan must respond flexibly to such movements to avoid disruptions in the market.

Central banks in the United States and Europe continue to raise interest rates. As a result, the pressure for the yen to depreciate in response to the widening interest rate gap with Japan's sustained large-scale easing remains strong. 

The Bank of Japan must closely monitor currency fluctuations. And it must carefully manage its interest rate operations to address these challenges.

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(Read the editorial in Japanese.)

Author: Editorial Board, The Sankei Shimbun