Bank of Japan to reduce government bond purchases to normalize monetary policy
TOKYO, Japan — The Bank of Japan announced on Friday that it would decrease its holdings of government bonds as part of its strategy to gradually move away from its ultra-loose monetary policy.
While the central bank decided to keep interest rates unchanged after a two-day meeting, it revealed plans to “reduce its purchase amount of JGBs (Japanese Government Bonds) thereafter to ensure that long-term interest rates would be formed more freely.” The specifics of this reduction over the next one to two years will be determined at the next policy meeting in July.
The decision to defer any immediate action until next month had an impact on the yen, causing it to weaken against the dollar. However, the news that borrowing costs would remain stable for the time being led to a 0.7 percent increase in the benchmark Nikkei index in the afternoon.
In a bid to normalize policy without risking the stability of Japan’s economy, the BoJ raised rates in March for the first time since 2007. This latest move signifies another step away from the prolonged period of quantitative easing that aimed to address stagnation and deflation in the country.
The Bank of Japan currently aims to purchase around six trillion yen ($38 billion) worth of government bonds each month to inject liquidity into the financial system and maintain low borrowing costs. As the bank holds more than half the value of all JGBs in circulation, reducing these purchases has been under consideration for some time.
The policy decision reflects the BoJ’s commitment to moving towards a more normalized monetary approach. Despite concerns about Japan’s fragile economic recovery and high public debt, experts believe the central bank will proceed cautiously in this transition.
Moreover, the BoJ is keen to see demand-driven inflation reach 2 percent, driven by wage growth. While Japanese inflation has surpassed the target since April 2022, analysts are wary of attributing this solely to sustainable factors like the conflict in Ukraine.
The bank expects “a virtuous cycle from income to spending” to intensify gradually, supported by favorable financial conditions. However, uncertainties persist around Japan’s economic activity and prices, prompting the BoJ to tread carefully in its policy adjustments.
In addition to ending its negative-rate policy in March, the Bank of Japan has also started phasing out other unconventional measures such as its yield curve control program, which aimed to keep bond yields within a narrow range.
As inflation remains a lingering concern, experts predict that a further rate hike could be on the horizon in July or September. However, the exact timeline for this remains uncertain as the central bank navigates the complexities of Japan’s economic landscape.
