In a strategic shift, the Bank of Japan (BoJ) has taken significant steps to move away from its ultra-loose monetary policy, a stance it has maintained since 2013. This decision comes as the BoJ aims to achieve its inflation target of 2%, measured by the overall Consumer Price Index (CPI), on a sustainable basis. The central bank, which sets the monetary policy in Japan, had initially embarked on this expansive approach to stimulate the economy and combat a persistently low-inflationary environment. However, recent economic developments and global market movements have necessitated a reevaluation of this strategy.
The BoJ's policy, based on Quantitative and Qualitative Easing (QQE), involved printing banknotes to purchase assets such as government and corporate bonds to increase liquidity in the market. While this approach boosted liquidity and stimulated economic activity, it also led to a significant depreciation of the Yen against major currency peers. The weaker Yen, combined with a spike in global energy prices, caused an unexpected rise in Japanese inflation, surpassing the BoJ's targeted 2% threshold.
In response to these inflationary pressures and the widening differential with other currencies, the BoJ took decisive action in March 2024 by lifting interest rates. This marked a departure from its prolonged ultra-loose monetary policy stance, which had further loosened in 2016 through the introduction of negative interest rates and direct control over the yield of 10-year government bonds. The BoJ's latest move reflects its commitment to ensuring price stability and achieving its inflation target sustainably.
The BoJ's shift in policy comes at a time when other major central banks have opted for sharp interest rate hikes to combat record-high inflation levels. This divergence in policy approaches had exacerbated the depreciation of the Yen in 2022 and 2023, posing challenges for Japan's economic stability. The central bank's decision to adjust its policy now seeks to align its strategies more closely with global economic realities while maintaining its focus on price stability.
The impact of the BoJ's policy changes is evident in the currency markets, where the USD/JPY pair tracks renewed upside in the US Dollar amid a positive shift in risk sentiment. This shift followed US President Trump's decision to delay tariffs on Canada and Mexico by a month. At present, the USD/JPY pair is paring back gains to close in on 155.00, remaining 0.23% higher on the day. However, in Tuesday's Asian session, it continues to trade below 155.50.
The BoJ's strategy to issue banknotes and execute currency and monetary control has been integral to its efforts to stabilize prices. As it navigates this transition from an ultra-loose policy stance, the central bank remains focused on achieving its inflation goals responsibly. The challenge lies in balancing domestic economic needs with external pressures from global financial markets.