Home » The Bank of Japan’s Ultra-Loose Monetary Policy and the Uncertain Fate of the Yen

The Bank of Japan’s Ultra-Loose Monetary Policy and the Uncertain Fate of the Yen

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Maintaining ultra-loose monetary policy, the yen’s decline may not be over yet

Xinhua News Agency, Tokyo, September 24 (International Observation) – The Bank of Japan has decided to continue implementing its ultra-loose monetary policy, a move that suggests the nation’s central bank is determined to revive the economy. This decision is expected to have implications on Japan’s weakening yen and high inflation.

During a recent monetary policy meeting, the Bank of Japan announced that it will maintain short-term interest rates at minus 0.1% and purchase long-term government bonds to keep long-term interest rates at around zero.

The country has been experiencing a rise in inflation due to the sharp increase in the price of imported goods and the subsequent impact on downstream industries. Japan’s core consumer price index saw a year-on-year increase of 3.1% in August, marking 12 consecutive months of year-on-year growth above 3%.

Bank of Japan Governor Kazuo Ueda, who took office in April this year, had previously expressed confidence that inflation would fall significantly and may even drop below 2% by the second half of the year. However, during a press conference on September 22, he admitted that inflation is currently decreasing at a slow pace. Ueda stated that the central bank lacks confidence in achieving the 2% inflation target in a stable and sustainable manner, which is why the ultra-loose monetary policy must be maintained.

The Japanese economy is currently facing various challenges. Domestically, personal consumption remains weak while inflation persists. On an international level, the interest rate hike carried out by the Federal Reserve has widened the interest rate gap between the United States and Japan, resulting in immense pressure on the Japanese yen due to continued depreciation. The Bank of Japan is concerned about the negative consequences that the Fed’s interest rate hikes may bring, as the spillover effect could drag down the Japanese economy.

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Analysts argue that the Bank of Japan’s primary objective is to stabilize domestic prices, therefore, it will not tighten monetary policy in response to the depreciation of the yen. However, continued depreciation is likely to worsen price increases and suppress domestic demand. Hayuri Shirai, a professor at Keio University, noted that the excessive depreciation of the yen has reduced consumer purchasing power and slowed down corporate investment and production.

Hiroshi Fujishiro, chief economist at Japan’s Dai-ichi Life Economic Research Institute, highlighted the connection between the yen’s depreciation and the central bank’s loose policies. Given the weakness of Japan’s economy, the central bank is unable to adopt tightening policies. Even if the Bank of Japan were to tighten its monetary policy, the yen’s strengthening alone would not guarantee a certain economic recovery for the country.

As the market predicts that the Federal Reserve might raise interest rates again this year, with possible delays in interest rate cuts next year, the Japanese yen has recently fallen against the U.S. dollar in the Tokyo foreign exchange market, reaching a new low since November last year at 148 yen per U.S. dollar. This value is lower than last September when the Japanese Ministry of Finance took action to stabilize the exchange rate, bringing the yen-dollar exchange rate to nearly 146 to 1.

Shirai pointed out that the Federal Reserve’s continual interest rate hikes and the Bank of Japan’s ongoing easing policy have resulted in a continuous decline in the yen exchange rate since May of this year. Despite the current cost-push inflation in Japan, the excessive depreciation of the yen leaves the possibility of the central bank adjusting its policies within the next six months.

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[Editor in charge: Wu Liang]

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