While the central banks of major economies around the world turn hawkish to contain breakneck inflation, Bank of Japan (BOJ) is still the noteworthy exception with its maintenance of ultra-loose monetary policy.
Notes released on Monday indicate that BOJ’s 16 – 17 June policy meeting saw board members commit to ultra-low interest rates, as well as the unusual move of maintaining the 0.25% cap on long-term bond yields via endless purchasing.
BOJ’s decision to engage in the unorthodox tactic of buying long-term Japanese government bonds (JGB’s) without limit embodies its commitment to keeping monetary policy in an extremely loose state.
Figures from the QUICK database indicate that as of 20 June BOJ owned 514.9 trillion yen in long-term JGB’s out of 1021.1 trillion yen outstanding, equivalent to 50.4% the total.
By buying up long-term JGB’s BOJ increases their prices, which in turn reduces long-term interest rates, because bond prices and yields move inversely.
The pressure on BOJ to purchase JGB’s is only on track to increase, as interest rate hikes in the US and Europe make their fixed income securities more appealing at the expense of Japan’s.
This upwards pressure means that BOJ needs to purchase even more long-term JGB’s, in a bid to keep their prices high and their yields low.
Estimates from the Japan Centre for Economic Research indicate that BOJ could end up increasing its JGB holdings by around 120 trillion yen compared to their current levels, which would leave it with over 60% of the total.
BOJ has been placed in this difficult position by the fact that it is still the stark outlier amongst the central banks of major advanced economies in its commitment to loose monetary policy.
In sharp contrast, the central banks of most other advanced economies are lifting interest rates to combat rampant inflation.
In June the US Federal Reserve pushed through a 75 basis point hike, for the largest increase since 1994. The Fed has lifted its target interest rate by 150 basis points altogether since the start of the year, while another 75 basis point hike remains a strong likelihood in July.
On the other side of the Atlantic the Bank of England (BOE) implemented its fifth consecutive hike in June, with its Monetary Policy Committee voting to lift the Bank Rate by 25 basis points to 1.25%
The European Central Bank (ECB) is expected to raise its target rate by at least 50 basis points in the summer, marking a turnaround from its long-standing policy of negative interest rates.
The Reverse Bank of Australia (RBA) has also pursued a similar about face, raising interest rates for the first time in 11 years with a 25 basis point hike in May.
Why has BOJ managed to remain the exception? A key reason for this is that inflation in Japan is still tepid, while price increases rage out of control in the US, the EU and the UK.
Japanese monthly inflation rate
In May Japan’s headline consumer price inflation rose 2.5% compared to the same period last year. While the figure is ahead of BOJ’s target rate of 2%, it is small beans compared to inflation of 8.6% for the US in the same month, as well as 8.1% for the Euro zone and a stunning 9.1% for the UK.
Amidst the trend of raging inflation in advanced economies and corresponding hawkish rate hikes by their central banks, BOJ’s commitment to ultra-loose monetary policy can only bode poorly for the prospects of the yen in months to come. The USD/Yen currently stands at close to 136.