Japan: Significant Changes in the Policy Position of Japanese Banks
2024-05-16
■ At the Bank of Japan monetary policy decision-making meeting, significant concerns about the depreciation of the Japanese yen and the potential necessity of policy responses were raised, highlighting the possible global economic impact.
■ Based on considerations for 2022, if it is necessary to curb the depreciation of the Japanese yen, it is expected to be addressed through monetary policy.
In the main opinion released at the Bank of Japan's monetary policy decision meeting (held from April 25th to 26th, hereinafter referred to as the "Main Opinion"), concerns were raised that the depreciation of the yen, and the rise in crude oil prices may trigger cost-push inflation, which may lead to price increases. Still, these concerns were not raised in March. In addition, when the outlook on the economic and price situation is realized, the interest rate path may be higher than market expectations, and if the core inflation rate continues to rise in the context of the depreciation of the yen, it may accelerate the speed of normalization, and so on. Although it indicates the policy of maintaining a loose monetary environment, it also implies the possibility of accelerating the normalization of monetary policy as needed.
"Main opinions" refer to the opinions expressed by policy commissioners at monetary policy decision-making meetings, which are selected and summarized by policy commissioners. They are edited and published by the Speaker (President of Bank of Japan), making it easier to directly reflect the opinions of policy commissioners rather than meeting minutes edited by the Secretariat. Due to the lack of clear guidelines for responding to the depreciation of the Japanese yen in the statement of the monetary policy decision meeting released on April 26th and the press conference of Bank of Japan President Yoshida, many policy commissioners have increased their vigilance against the sharp depreciation of the foreign exchange market after the meeting. The time and speed of policy normalization are expected to be flexibly adjusted. On May 13, although within the preset range, the purchase of treasury bonds held for more than five years but not more than ten years began to decrease, and the actual policy response also began to change.
Since adjusting the Long Short Term Interest Rate Operation (YCC) in December 2022, the Bank of Japan has been cautiously promoting the normalization of monetary policy, especially since taking office in April 2023. Despite successfully avoiding the biggest concern of a sharp rise in long-term interest rates, sharp exchange rate fluctuations still limit the implementation of policies. Based on the three difficulties of international finance, as a country that adopts a floating exchange rate system, Japan faces structural challenges in maintaining an independent monetary policy and free capital flow while maintaining a stable exchange rate. Given the widespread expectation of tightening the monetary policy in the United States, Japan's lagging monetary policy may require more coordinated monetary policies with other countries or restrictions on capital flows to improve exchange rate stability. In 2022, Japan intervened in the foreign exchange market in September and October and adjusted the operations of YCC in December. The re-implementation of foreign exchange intervention actions in April and May, coupled with the necessity of responding to the yen's depreciation through monetary policy, may increase the advance of normalization and is expected to lead to policy changes.
■ Based on considerations for 2022, if it is necessary to curb the depreciation of the Japanese yen, it is expected to be addressed through monetary policy.
In the main opinion released at the Bank of Japan's monetary policy decision meeting (held from April 25th to 26th, hereinafter referred to as the "Main Opinion"), concerns were raised that the depreciation of the yen, and the rise in crude oil prices may trigger cost-push inflation, which may lead to price increases. Still, these concerns were not raised in March. In addition, when the outlook on the economic and price situation is realized, the interest rate path may be higher than market expectations, and if the core inflation rate continues to rise in the context of the depreciation of the yen, it may accelerate the speed of normalization, and so on. Although it indicates the policy of maintaining a loose monetary environment, it also implies the possibility of accelerating the normalization of monetary policy as needed.
"Main opinions" refer to the opinions expressed by policy commissioners at monetary policy decision-making meetings, which are selected and summarized by policy commissioners. They are edited and published by the Speaker (President of Bank of Japan), making it easier to directly reflect the opinions of policy commissioners rather than meeting minutes edited by the Secretariat. Due to the lack of clear guidelines for responding to the depreciation of the Japanese yen in the statement of the monetary policy decision meeting released on April 26th and the press conference of Bank of Japan President Yoshida, many policy commissioners have increased their vigilance against the sharp depreciation of the foreign exchange market after the meeting. The time and speed of policy normalization are expected to be flexibly adjusted. On May 13, although within the preset range, the purchase of treasury bonds held for more than five years but not more than ten years began to decrease, and the actual policy response also began to change.
Since adjusting the Long Short Term Interest Rate Operation (YCC) in December 2022, the Bank of Japan has been cautiously promoting the normalization of monetary policy, especially since taking office in April 2023. Despite successfully avoiding the biggest concern of a sharp rise in long-term interest rates, sharp exchange rate fluctuations still limit the implementation of policies. Based on the three difficulties of international finance, as a country that adopts a floating exchange rate system, Japan faces structural challenges in maintaining an independent monetary policy and free capital flow while maintaining a stable exchange rate. Given the widespread expectation of tightening the monetary policy in the United States, Japan's lagging monetary policy may require more coordinated monetary policies with other countries or restrictions on capital flows to improve exchange rate stability. In 2022, Japan intervened in the foreign exchange market in September and October and adjusted the operations of YCC in December. The re-implementation of foreign exchange intervention actions in April and May, coupled with the necessity of responding to the yen's depreciation through monetary policy, may increase the advance of normalization and is expected to lead to policy changes.