The normalization of monetary policy in Japan
The Bank of Japan (BOJ) on March 15, 2024, increased its policy rate from 0% to 0.1% and abandoned its yield curve control. The trigger for this monetary policy change, argues Takatoshi Ito, was the increase in average wage growth of 5.28% and the rise in inflation, as well as inflation expectations, to 2%. Will the BOJ continue its monetary policy normalization? There are a couple of risks to consider:
Increases in the long-term interest rate could lead to a significant fall in the mark-to-market valuation of long bonds. But Ito argues, the regional banks in Japan that hold long-maturity bonds, are well-capitalized for the most part, so a 1-2% increase in the long bond rate might not amount lead to problems similar to the ones SVB faced last year in the U.S.
Another risk is that the BOJ’s profits could turn negative. The BOJ has announced that it will start paying 0.1% interest to current-account balances, including its holdings of banks’ excess reserves. As the interbank rate fluctuates between 0% and 0.1%, the remunerated reserves essentially provide a subsidy to commercial banks. And it will be expensive: ¥517 billion ($3.3 billion) in 2024, compared to ¥183 billion last year. This is still small enough that the BOJ would report surpluses – unless it hikes its policy rate to 1% before it shrinks its balance sheet.
How Risky Is Japan’s Monetary-Policy Normalization?
By: Takatoshi Ito – Columbia University
…but the yen keeps on weakening
The Japanese yen recently reached the value it had back in 1990, shortly after Japan’s famous “bubble economy” burst. On April 29, it was trading at 160 yen to US$1 when a few years ago, it was closer to 100 yen to US$1. In this commentary, Noah Smith argues that it’s the BOJ’s reluctance to see the recent increase of inflation as a frightening prospect. The recent BOJ’s small rate hike did not prevent Japan’s real rate to now be lower than that of other rich countries. Smith argues that the Bank of Japan’s over cautious approach could be due to the very large amount of government debt which currently is at 261% of Japan’s GDP. Even though almost half of that debt is held by the BOJ, the Japanese government still has to pay interest on debt of more than 130% of GDP, which is unusually high.
If Japan is truly in a situation of fiscal dominance, it’s in very big trouble. As long as interest rates stay high around the world and low in Japan, it means that the yen will keep weakening until the cost of food and fuel imports reaches crisis levels.
Is Japan having a currency crisis?
By: Noah Smith
