Bank of Japan Perceived to Be Testing Exit Strategy Despite Denials
December 20, 2022
At the last scheduled Bank of Japan policy review in 2022 and with Governor Kuroda’s decade-long tenure approaching its April 2023 end, the Board decided to double the allowable daily trading corridor of the 10-year JGB yield from +/-0.25 to plus or minus 0.50 percentage points around a central target of “around zero percent.” The BOJ has been the most notable holdout from monetary tightening around the world, and Governor Kuroda went to great extent denying that the move constituted a rate hike or a first step toward exiting the policy known as quantitative and qualitative monetary easing with yield curve control. BOJ officials project that it will take quite some time longer before the goal of sustained 2% core inflation is realized and project that inflation will be falling again in the second half of next fiscal year. Today’s action was projected as a technical policy tweak to correct distortions in the yield curve and is intended to enhance the transmission of central bank policy to the financial system. The short-term policy rate was kept at -0.10%, and a planned increase of monthly central bank purchases of Japanese government bonds nine trillion yen was unveiled to underscore an unwavering commitment to ultra-easy monetary policy for as long as it takes.
Markets were hearing none of this effort to downplay what they perceive to be a huge and very unexpected change by the BOJ.
- The ten-year JGB yield climbed as high as 0.46% and closed 15 basis point higher today.
- The Nikkei-225 Japanese stock market index closed 2.5% lower and dragged share prices elsewhere in the Pacific Rim down by 1.5% in Australia, 1.3% in Taiwan and Hong Kong, 1.1% in China, 1.0% in New Zealand, and 0.8% in South Korea.
- The yen soared 4% against the dollar and was primarily responsible for a 0.9% drop in the DXY weighted dollar index.
If today’s step by the Bank of Japan in fact proves to mark the beginning of the end to its ultra-loose monetary policy, it will not be the first time that a momentous change coincided with a change in the central bank’s leadership. In the autumn of 1989, Yasushi Mieno took over the helm and immediately set upon a mission to establish credentials as a ruthless fighter against inflation. There had been some modest tightening earlier that year, and rates were raised further in mid-November of that year. Then on Christmas Day with almost every other market in the world closed and with Japanese CPI inflation at only 2.5%, the central bank board held an unscheduled emergency session and hiked the discount rate by another 50 basis points to 4.25%. Inflation never rose above 4% in that cycle, but the Bank of Japan wasn’t done and would tenaciously not begin to relax its tight stance until well into a recession in mid-1991. Considering that the Nikkei-225 all-time peak of 38,916 occurred less than a week after the Christmas Day massacre, and a third of a century later at 26,568 is still 31.7% below that high, one might argue that Mieno’s tough-guy approach to inflation was among the worst economic policy mistakes of the past half-century.
Copyright 2022, Larry Greenberg. No secondary distribution without express permission.
Tags: Bank of Japan
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