The Bank of Japan (BoJ) has taken a formal step to alter its very accommodative monetary policy. In March 2024, it unexpectedly raised interest rates and signalled an end to its long-standing ultra-loose monetary policy. This decision comes amid a wave of global central banks fighting inflation, which has recently reached levels higher than the BoJ’s long-term target of approximately 2%. Japanese Chief Cabinet Secretary Minoru Kihara was clear about the importance of this change. Mr. Shiozaki indicated that the government expects the Bank of Japan to take appropriate actions on monetary policy so that the inflation target will be achieved.
The BoJ’s mandate is to issue and circulate banknotes, to maintain currency and monetary control, and to realize price stability. The reality of global economics has shifted dramatically to necessitate this policy re-examination.
Background on Monetary Policy
This stemmed in part historically from the extreme accommodative monetary policy stance of the Bank of Japan. In 2016 it adopted negative interest rates and started directly controlling the yield on its 10-year government bonds. These measures were an attempt to fight ongoing deflation and encourage economic growth. Inflationary pressures have accelerated in recent years, driven in part by a weaker yen and accelerating global energy prices. Because of this, the necessity for change was evident.
By 2022 and 2023, the BoJ had started to chart its own course. While other major central banks raised interest rates drastically to address inflation at a 40-year high, the BoJ went the other way. This divergence only exacerbated the confluence of headwinds facing Japan’s economy. The rejuvenated policies from the BoJ became increasingly out of step with the global picture.
Inflation Exceeds Targets
The impacts of these economic policies have been astonishing. For the first time in decades it has been above the Bank of Japan’s 2% target. This increase is primarily attributed to a depreciated yen and rising international energy costs. Read more Consumer prices have spiked, adding even more burdens on American families and businesses. This financial boom and bust have led to calls for a reconsideration of our monetary policy playbook.
As inflation rates increased rapidly, the BoJ’s years-long ultra-loose monetary policy came under criticism from domestic and international balconies. After all, the central bank has had a much longer-run commitment to maintaining low interest rates. With inflationary pressures mounting across all sectors of the economy, this practice is increasingly difficult to maintain.
The Future of Monetary Policy
In March 2024, policymakers were saying more helpful things. In response, the Bank of Japan on July 20 2023 raised interest rates, a historic about-turn in its policy direction. This shift is meant to reassert control over an inflation that quickly took on a recessionary guise. It aims to create greater harmony with international monetary developments.
“expects the Bank of Japan (BoJ) to conduct monetary policy to appropriately achieve the inflation target” – Japanese Chief Cabinet Secretary Minoru Kihara
As the BoJ pursues this new direction, analysts will be watching its steps and their effects on Japan’s economy. The end of nearly four decades of ultra-loose monetary policy will have profound consequences for the country’s financial landscape. It will influence investment strategies and consumer choices in numerous ways.