Bank of Japan shocks markets with strategy change

Bank of Japan

The Japanese central bank had always emphasized that it was the only major central bank in the world to maintain its strategy of extremely loose monetary policy and support for domestic demand.

(Photo: IMAGO/AFLO)

Tokyo With an unexpected change of strategy, the Japanese central bank sent shock waves through the markets on Tuesday. The Bank of Japan (BoJ) decided to ease the range of long-term bond yields after a two-day meeting on Tuesday.

This was seen by the markets as the first step towards tightening the monetary reins. Up until that point, the BoJ had always insisted that it was the only major central bank in the world to maintain its strategy of ultra-loose monetary policy and support for domestic demand.

Asian stock markets plummeted as a result of the news. The Nikkei Index, which comprises 225 stocks, fell by 2.5 percent to 26,568 points. The broader Topix index closed about 1.5 percent at 1,906 points. The Shanghai stock exchange and the index of the most important companies in Shanghai and Shenzhen were each more than one percent in the red. The yen rose to a four-month high against the dollar. In turn, the dollar fell about three percent to 132.91 yen.

The BOJ stuck to its program of keeping borrowing costs at an all-time low. However, it decided to allow 10-year Japanese government bond yields between minus 0.5 percent and 0.5 percent. That’s above the current range of minus 0.25 percent and 0.25 percent. The decision surprised even economists.

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According to economists, the BoJ’s move means that lending rates for companies and households will rise and the central bank will buy fewer government bonds in the markets in the future. The BoJ holds over 50 percent of government bonds.

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It is a “first step towards a policy change away from extremely low interest rates and towards a more balanced policy that also includes the significantly increased prices and the extremely weak yen,” said Martin Schulz, chief economist at the Japanese technology group Fujitsu, explaining the surprising step of the BoJ.

In view of rising international inflation and the now extremely weak yen, monetary policy is now attempting to tackle this challenge in a more “balanced” manner and with higher interest rates again in the long term. This poses a new challenge for Prime Minister Fumio Kishida’s government to consider higher taxes to fund its spending.

Companies will also no longer be able to rely on cheap money in the future. According to economists, they must now invest more in their competitiveness, for example through digitization.

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