Monetary Policy Change toward Normalization

The Bank of Japan announced on March 19 that it decided to terminate its ultraloose monetary policy, Quantitative and Qualitative Monetary Easing with Yield Curve Control and negative interest policy. Judging “it came in sight that the price stability target of 2 percent would be achieved in a sustainable and stable manner,” the bank considered that “its large-scale monetary easing measures have fulfilled their roles.” However, it is not a declaration of getting rid of decades-long deflation.

In the Monetary Policy Meeting, the policy board members agreed on setting a new target of uncollateralized overnight call rate, or short-term interest rate, at around 0 to 0.1%. The rate had been pushed below zero at minus 0.1%, which was applied to the accounts of private financial institutions holding at BOJ. It was the first time for BOJ to raise this rate since 2007, marking the end of negative interest rate policy introduced in 2016.

 

BOJ also announced that it would abolish yield curve control, through which it sought a decline in real interest rates by controlling short- and long-term interest rates, and discontinue purchases of exchange-traded funds (ETFs) and Japan real estate investment trusts (J-REITs).

 

Those policies consisted main pillars of BOJ’s large-scale monetary easing. “Given the current outlook for economic activity and prices, it anticipates that accommodative financial conditions will be maintained for the time being,” says the statement of BOJ.

 

The decision was accepted as the first step toward normalization of BOJ’s monetary policy. It was only Japan in the world which central bank was upholding negative interest rate. “It will conduct monetary policy as appropriate, guiding short-term interest rate as a primary policy tool,” says the statement. Finishing negative interest rate and yield curve control means getting back to normal.

 

However, BOJ decided to continue purchasing Japanese government bonds as the same amount as before, which amounts to ¥6 trillion every month. As a result of purchasing of JGBs under large-scale monetary easing policy, JOB holds over a half of JGB as a whole, possibly distorting the market. “Heritage will be remaining,” said BOJ Governor, Kazuo Ueda, in his press conference, indicating maintenance of environment for monetary easing.

 

Prime Minister Fumio Kishida welcomed the decision of JOB. “From the perspective to ensure positive moves in economy, it is appropriate to maintain environment of monetary easing,” said Kishida to the reporters. He also said that he did not think about changing the joint statement between the government and BOJ in 2013, in which the both agreed on working together on overcoming deflation.

 

To overcome deflation, the government and BOJ have to achieve wage hike beyond price hike. To achieve that positive cycle, they need to create a situation in which small and mid-size enterprises can add cost on price of their products. Ueda indicated a possibility to back to yield curve control, if the decision would not achieve its goal.