Bank of Japan BOJ cancels hopes of exiting ultra-easy policy

The Bank of Japan has pushed back on speculation its latest policy adjustment marked the start of a tightening cycle.

Deputy Governor Shinichi Ichida reiterated on Wednesday that the central bank’s flexible tolerance threshold for long bond yields is just a necessary change to maintain its ultra-easy monetary policy stance.

On Friday, the BOJ unexpectedly loosened its yield curve controls, a move that some market observers said marked the beginning of the end of the Japanese central bank’s ultra-easy monetary policy stance. The so-called YCC is a political tool used to target longer-term interest rates.

“The Bank’s decision to conduct yield curve control with greater flexibility aims to patiently continue monetary easing while responding to both upside and downside risks amid extremely high uncertainties for economic activity and prices at home and abroad,” Ichida said in prepared comments for a public speech in Chiba Prefecture.

“Needless to say, we do not have an exit from monetary easing in mind,” he added.

Speculation of such an exit arose after the BOJ’s surprise decision to offer “flexibility” to buy 10-year Japanese government bonds at 1% yield through fixed-rate operations. However, the central bank stuck to its existing plan to allow interest rates to fluctuate in the range of around plus and minus 0.5 percentage points from its 0% target level.

On Wednesday, Japan’s 10-year bond yield hit another fresh nine-year high of around 0.63% after the BOJ left its purchase offers unchanged from last month in its fixed-rate operations.

The BOJ’s yield curve control is part of its ultra-easy monetary policy, which also includes keeping short-term interest rates at -0.1%. It aims to restore growth in the world’s third-largest economy and sustainably reach its 2% inflation target after years of deflation.

On Wednesday, Ichida said there is “still a long way to go” before Japan’s central bank will even consider raising short-term interest rates from the current -0.1% to 0%.

Ichida said the BOJ needs to maintain an ultra-easy monetary policy and keep interest rates low to “carefully nurture” beginning signs of change seen in companies’ wage and pricing behavior.

He added that it was difficult to change the cautious attitudes “so deeply entrenched” among companies, even after Japan’s economy reached a point where it was no longer in deflation.

The central bank has been under pressure to tighten monetary policy as inflation has consistently exceeded its 2% target for 15 consecutive months, while wages are finally starting to rise after years of stagnation.

This position pits the BOJ squarely against the global wave of monetary policy tightening over the past 12 months, as inflation rose following the resumption of economic activity as the world emerged from the pandemic.

“Every policy has its positive effects, but it also always comes with costs. There is no free lunch for any policy,” Ichida said. “When inflation expectations rise, not only the easing effects are amplified, but also the side effects. It is necessary to find an optimal balance between the two.”