Dusseldorf While the central banks of other Western industrial nations are raising interest rates and reducing liquidity in the fight against inflation, the Japanese central bank is sticking to its low interest rate policy and is buying up Japanese government bonds on a large scale.
It does this to defend so-called “yield curve control,” the bedrock of Japan’s monetary and fiscal policies, against hedge funds. “The hedge funds are betting that the fall of the yen will drive inflation and the central bank will therefore have to widen the interest rate corridor of its yield curve control policy, i.e. actually raise interest rates,” explains Japan correspondent Martin Kölling in the current episode of Handelsblatt-Today.
With the instrument introduced in 2016, the central bank does not, like other banks, set a key interest rate that it defends. Instead, it wants to control the entire yield curve, i.e. the interest rates of bonds of all maturities.
In this way, it wants to achieve several contradictory goals at the same time: growth, stability of insurers and the affordability of debt service. For the past 20 years, the monetary authorities have been buying government bonds in order to keep the key interest rate for ten-year Japanese government bonds (JGB) close to zero percent. This in turn weakens the yen and has recently led to significant real income losses.
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Critics are now asking: How many government bonds can the Bank of Japan buy before the JGB market collapses? Experts also warn of the risk of capital flight from Japanese households.
Is Japan threatened with economic collapse? Host Anis Micijevic talks about this with the Japan correspondent Martin Kölling in the current episode of Handelsblatt Today.
More: Yen plummets, debt rises – Japan nears economic collapse
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