Understanding the Bank of Japan’s Monetary Policy

Recently, the Bank of Japan (BoJ) Governor Kazuo Ueda stated that Japan’s trend inflation is on the rise and emphasized the importance of making appropriate monetary policy decisions. Service prices are seeing a moderate increase, and there is an expectation for a positive cycle to strengthen, with a tight labor market leading to higher wages and household income. Governor Ueda also highlighted the need for foreign exchange (FX) rates to reflect fundamentals and remain stable. However, he refrained from commenting on specific FX levels, acknowledging that these rates are influenced by various factors.

The Bank of Japan serves as the country’s central bank, responsible for setting monetary policy. Its primary mandate is to issue banknotes and maintain currency and monetary control to ensure price stability, aiming for an inflation target of approximately 2%. Since 2013, the BoJ has pursued an ultra-loose monetary policy to stimulate the economy and boost inflation in a low-inflation environment. This approach is centered on Quantitative and Qualitative Easing (QQE), involving the issuance of currency to purchase assets like government or corporate bonds to enhance liquidity.

Policy Adjustments and Effects

In 2016, the Bank of Japan intensified its policy by initially introducing negative interest rates and subsequently controlling the yield of its 10-year government bonds. These measures were aimed at further loosening monetary conditions. The significant stimulus efforts by the BoJ have caused the Japanese Yen to depreciate against other major currencies. This depreciation has been exacerbated by a growing policy divergence between the BoJ and other central banks, with the latter opting to raise interest rates significantly to combat high inflation rates.

The BoJ’s strategy of maintaining low interest rates has created a widening gap compared to other currencies, resulting in a decline in the value of the Yen. The combination of a weaker Yen and a surge in global energy prices has fueled inflation in Japan, surpassing the BoJ’s 2% target. Despite this uptick in inflation, achieving sustainable and stable growth towards the target remains a challenge. Therefore, any abrupt changes to the current policy stance by the Bank of Japan seem unlikely at this point.