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EDITORIAL | New BOJ Monetary Policy Must Not Impede Economic Recovery

In this new "world with interest rates," the BOJ must carefully time its reductions and manage its policy to avoid causing turmoil in the markets.



The Bank of Japan headquarters in Tokyo. (©Sankei by Kanata Iwasaki)

The Bank of Japan (BOJ) has taken another step towards normalizing interest rates. Earlier this spring, it began raising interest rates, signaling a shift away from its unprecedented monetary easing stance. 

On June 14, the BOJ board of directors held its monetary policy meeting. Notably, it decided to reduce the amount of government bond purchases it had been pursuing to keep long-term interest rates low. 

At its next meeting at the end of July, the board is slated to decide on a further tapering plan for the next two years. It is also possible that they will raise interest rates. 

The BOJ ended its negative interest rate policy at its March meeting. However, it has maintained its government bond purchases at the previous level of ¥6 trillion JPY (about $38 billion USD) per month. In doing so it expects to avoid a sharp rise in long-term interest rates. With this latest decision, the BOJ is now moving towards tightening "quantitative" policy in addition to interest rates. 

Monitoring Japan's Economic Recovery 

Although concerns about inflation linger, wage gains in the shunto spring offensive were widespread, and economic activity remains solid. It is only natural that monetary policy should now move away from the long-lasting phase of crisis response. 

However, it would be counterproductive if this new "world with interest rates" is allowed to go too far and short-circuit the economic recovery. The BOJ must carefully time its reductions and manage its policy to avoid causing turmoil in the markets. 

Bank of Japan Governor Kazuo Ueda holds a press conference in Tokyo on June 14. (©Sankei by Kanata Iwasaki)

At a press conference following the June 14 meeting, BOJ Governor Kazuo Ueda explained. "We decided to reduce the amount [of purchases] so that long-term interest rates can be formed more freely in the market." 

Restoring Normal Market Functions

The BOJ purchased a massive amount of government bonds through quantitative easing. Thereafter, it has been difficult to determine the appropriate interest rate levels in the market for government bonds. As the BOJ continues to reduce the amount of its purchases, the functioning of the market needs to be steadily restored. 

Governor Ueda has said the reductions would be at "an appropriate level." At its July meeting, the BOJ should clarify the levels and pace of its planned reductions in government bond purchases. 

Currently, the BOJ's government bond purchases stand at approximately ¥600 trillion ($38 billion). Eventually, the time will come when it will stop buying and even start selling these bonds. Hopefully, the BOJ will listen to market participants and clearly signal the path it intends to take. 

FOREX and the Weak Yen

Along with the market for government bonds, we need to keep an eye on the foreign exchange market

The BOJ's monetary policy is not decided with an intent to affect exchange rates. Nevertheless, the wide interest rate differential between Japan and the United States has been a critical factor in the yen's depreciation. Now the question is whether the reduction in bond purchases will lead to higher interest rates and a stronger yen. 

At the latest Federal Open Market Committee (FOMC) meeting on June 12, the Federal Reserve Board reduced its forecast for the number of interest rate cuts likely to be made in 2024 from three to one. 

With interest rate cuts in the US still a distant prospect, the yen depreciation trend may continue for quite some time. The BOJ must also carefully assess the impact this trend could have on the Japanese economy as a whole.


(Read the editorial in Japanese.)

Author: Editorial Board, The Sankei Shimbun