Tokyo Shortly before the next interest rate decision on Wednesday, the central bank of Japan is again causing unrest on the markets. “The back and forth battle between the Bank of Japan and the markets is increasing in intensity,” is how Japan’s business newspaper “Nikkei” described Monday’s massive purchases of Japanese government bonds, with which the central bank is trying to defend the basis of its monetary policy: the so-called yield curve control .
With this type of monetary policy, the central bank announces the range within which it intends to keep the yields on ten-year government bonds (JBGs) and then tries to ensure compliance with targeted bond purchases. The Bank of Japan surprisingly doubled this range for ten-year government bonds in December to minus 0.5 to plus 0.5 percent, triggering speculation about a possible elimination of the corridor.
She recently had to buy JGBs for 2.2 trillion yen (15.2 billion euros) in order to bring interest rates back below 0.5 percent. This means that the total bond purchases since December 20, when the central bank widened the interest rate corridor, have risen to over 33 trillion yen (240 billion euros). The Bank of Japan previously owned more than half of Japan’s government bonds.
What is driving the event are the big bets by global investors that the yield curve control introduced in 2016 will soon come to an end. With its policy, the central bank is pushing interest rates on short-term bonds into the red and allowing ten-year bonds to fluctuate around zero. Only on Monday were interest rates for the second trading day in a row at 0.51 percent and thus above the central bank’s limit. This increases uncertainty about Japan’s future monetary policy.
Top jobs of the day
Find the best jobs now and
be notified by email.
“The January monetary policy committee meeting will be a close one,” said Izumi Devalier, Japan and Asia economist at Bank of America. She expects the central bank to stick to its policy after its pre-Christmas surprise. “But the risk of yield curve control being scrapped is high,” she adds. The bond market is getting worse and worse.
According to Devalier, markets are already pricing in an end to central bank governor Haruhiko Kuroda’s policies. Stefan Angrick, an economist at Moody’s Analytics, even warns: “Yield curve control appears to be coming to a chaotic end in Japan.” He notes: “Futures markets are anticipating a series of steady rate hikes in 2023.”
Kuroda Incites “Volatility and Confusion”
The mood swing is radical. Before the last meeting, most central bank observers still assumed that the Bank of Japan would not tighten monetary policy until the end of Kuroda’s term in April 2023.
After all, inflation in November, at 3.8 percent, was well below that of other industrialized countries. And the central bank officially assumed that price increases would soon fall below the inflation target of two percent. Suddenly, on December 20th, Kuroda turned around.
In November, Kuroda announced that he would not be available for another term.
(Photo: Bloomberg)
Kuroda justified it by saying that monetary policymakers wanted to improve the functioning of bond trading. Instead, however, the expansion of the trade corridor “created volatility and confusion,” Angrick judges, so that the previous monetary policy has been called into question. The government’s economic policy, which has a relatively large influence on the central bank, is also being questioned.
After Prime Minister Shinzo Abe, who was assassinated last year, took office, the central bank began rapidly increasing its sales of JGBs in 2013 in order to generate inflation with a glut of money and support the expansive spending policy of the highly indebted country.
The possible consequences of another course reversal are currently becoming apparent on the foreign exchange and stock markets. In the fall of last year, pessimists were still expecting Japan to collapse after the yen had fallen rapidly in value to 150 yen against the dollar. The first are now warning of the yen soaring too quickly.
>>Read here: The Japanese central bank’s monetary policy turnaround was overdue – despite all the risks
Japan’s national currency briefly rose 1.2 percent against the dollar to just over 127 yen from Friday to Monday afternoon Japan time. This promptly pushed the Nikkei 225 index down 1.4 percent to 25,822 points on the stock market. Because a stronger yen depresses the profits of large corporations in foreign business when converted.
Wednesday will now show how the Bank of Japan intends to act in the short term. An end to yield curve control and even more so to the official zero interest rate policy is still considered unlikely. At the same time, tension is growing as to whether the election of the next central bank governor will allow conclusions to be drawn about a new monetary policy pact between the government and the Bank of Japan.
More: Relaxed monetary policy, high-spending tourists – Japan is hoping for rising share prices.