World Economy: Interest Rates, Monetary Policy and the Bank of Japan

The Bank of Japan (BOJ) kept its monetary policy stance unchanged at its most recent central meeting, and this event has had a drastic impact on the way many forex account traders are viewing the currency market. This meeting result was widely expected by market analysts, although the decision was not unanimous (7-2) and economic data suggest slightly improved economic conditions in the nation of Japan.  This is now influencing trends in forex pairs like the USD/JPY and the EUR/JPY.

Currently, the guidelines for market operations is set around yield curve control and the program for asset purchases.  Short-term interest rates will be kept at minus 0.1% for current account balances of financial Institutions with the Bank. 

Interest Rate Targets

The target for long-term interest rates is to achieve a zero rate on 10 year Japanese Government Bonds (JGB’s). It is continuing with bond purchases at a rate of 80 trillion Yen (about $800bn).The BOJ now hold more than one-third of all outstanding JGB’s.

In the other than JGB asset program, the BOJ will increase its purchases of Exchange Traded Funds (ETFs) and Real Estate Investment Trusts (REIT’s) to increase at an annual pace of respectively Y6 trillion and Y90 billion respectively.

Japan Monetary Policy

The two dissenters from the Policy Board meeting – chaired by Governor Haruhiko Kuroda – considered the current policy to have a negative impact on financial market intermediation. Mr. Takahide Kiuchi asked for a short-term rate to be set at plus 0.1% and no fixed target for the 10 years JGB’s. Mr. Takehiro Sato argued the continuing purchases of ETFs is excessive in light of the adverse impact on the pricing mechanism in the stock market and the BOJ’s financial soundness

At the press conference after the announcement Mr. Kuroda made it clear that the BOJ is only halfway towards the goal of a two percent inflation rate. It is therefore not foreseen that the BOJ will let up on the very accommodative monetary policy stance this year. Tapering is not in the vocabulary.

Forex Markets

The impact on the Yen was muted and changed hands between $/Y113.20 and $/Y113.75 after the announcement. Expectations for widening interest rate differentials as well as the discrepancy in growth prospects between America and Japan increase the risks for a stronger dollar.

A stronger dollar – inter alia brought on by the Trump expectations for higher growth in America – can easily be undone if the current ‘buy American’ and ‘employ American’ jaw boning falls flat. These are all factors that will be on the radar for forex traders that 

 

Richard Cox

Richard Cox has a PHD in Macroeconomics and has taught the subject at the university level. He writes for several internet news outlets, including: CNBC, TheStreet.com, NASDAQ, and the Motley Fool.

Follow Richard on Twitter: @RCox_

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