Explaining about the Meaning of “Challenging”

Bank of Japan decided at the Monetary Policy Meeting on Tuesday that it would maintain its large-scale monetary easing policy. While there had been a speculation in the market that the bank would move forward to the exit of the monetary easing, the bank showed a slow progress to the goal. Realizing that the exit would still be far away, Japanese yen declined against U.S. dollar. 

The bank decided to apply a negative short-term policy interest rate of minus 0.1% and to purchase a necessary amount of Japanese government bonds without setting an upper limit so that 10-year JGB yields would remain at around 0%. Regarding the upper bound of 1.0% for 10-year JGB yields as a reference in its market operations, and in order to encourage the formation of a yield curve that is consistent with the guideline for market operations, the bank announced that it would continue with large-scale JGB purchases. That policy changed nothing of the previous decision in late October.

 

Concerning high uncertainties at home and abroad, BOJ declared that it would patiently continue with monetary easing to achieve 2% price target, accompanied by wage increases. “The Bank will continue with Quantitative and Qualitative Monetary Easing with Yield Curve Control, aiming to achieve price stability target, as long as it is necessary for maintaining that target in a stable manner,” said the bank in its announcement released after the meeting.

 

It was something surprising that the bank would be so careful about getting rid of current monetary policy. Why was the market so hopeful for the policy change of BOJ? It was Governor Kazuo Ueda’s comment in the Diet in December 7th, in which he said that the situation would become “more challenging through the year-end to new year.” It was inevitable for the market expected that something would be happening in the monetary policy meeting in December.

 

In the press conference after the meeting, Ueda explained his comment in the Diet as his intention to focusing on his job with serious manner, denying immediate policy change. “Most members in the Policy Board hope to further consider the information coming up,” told Ueda, admitting rising possibility of achieving price stability target. He asked patience for achieving the goal.

 

However, the market showed disappointment on the highly moderate attitude of BOJ. Japanese yen dropped by ¥2 against U.S. dollar after Ueda’s press conference. Although Federal Reserve Board of United States maintained its policy interest rate in the latest meeting, it is expected that the gap of interest rate between U.S. and Japan will be wider, and the many bought U.S. dollar and sold Japanese yen. Weak yen causes further price hike of imported commodities, destabilizing consumption.

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