LA News Center: March 10, 2023
Chasing a Virtuous Circle
After years of experimenting with negative interest rates and unconventional easing tools, Japan’s central bank has finally decided to make a bold move. The Bank of Japan (BOJ) has abolished its ultra-loose monetary policy, showcasing its newfound confidence in the strength of the economy.
This decision comes on the heels of impressive wage negotiations by Japan’s largest trade union federation, Rengo. Wage hikes are projected to reach a provisional weighted average of 3.7%, even more robust than last year’s gains, which were the steepest in three decades. This signals a shift towards higher domestic demand, providing a foundation for sustainable price increases.
Exiting Negative Rates
The BOJ will now rely on an interest rate of 0.1% for current account balances held by financial institutions. This effectively raises the interest rate from its previous negative 0.1% value. It will also continue to target the uncollateralized overnight call rate at around 0 to 0.1%.
Goodbye, Yield Curve Control
The BOJ has also scrapped its yield curve control measure, which capped longer-term interest rates at around zero. This means that interest rates on Japanese government bonds (JGBs) will now fluctuate more freely, allowing the market to play a greater role in determining their yield.
Federal Reserve Influence
The BOJ’s decision comes as the global macroeconomic environment evolves. Central banks worldwide are raising interest rates to combat rampant inflation. The U.S. Federal Reserve is expected to announce its own rate decision on Wednesday, likely further contributing to market uncertainty.
Market Impact
The BOJ’s policy shift sent shockwaves through the markets. The Japanese yen plummeted to over 150 yen to the dollar, despite previous intervention attempts by Japanese authorities. However, the BOJ has emphasized the limited scope of its tightening narrative, seeking to prevent a rapid and widespread sell-off.
Potential Risks
Some economists express concern over the potential for repatriation of Japanese capital, as investors seek higher returns in the domestic bond market. This could lead to volatility in the global currency market. However, the BOJ’s commitment to maintain bond purchases and nimble market responses should help mitigate these risks.
Road Ahead
The BOJ has not provided a clear timeline for further rate hikes. It is likely to remain cautious amidst global economic uncertainty. While it may employ gradual rate increases, it is unlikely to embark on a swift tightening cycle that could spook the markets.
A Pivotal Moment
The BOJ’s policy shift marks a significant turning point for Japan’s economy. It signals the central bank’s growing confidence in the recovery and its willingness to embrace more orthodox monetary tools. This historic move could pave the way for a more stable and prosperous economic future for the nation.
Data sourced from: cnbc.com
