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The Last Samurai: Bank of Japan? The Bank of Japan continued to stand still amid a frenzy of rate hikes by central banks around the world. This Thursday, the Bank of Japan will announce its interest rate decision, and the market expects the Bank of Japan Governor Haruhiko Kuroda and his board members to keep their yield curve control policy (YCC) unchanged. And just before that, the Fed may have just raised rates for the third time in a row by 75 basis points, as the market bet. Since the Federal Reserve officially started the interest rate hike cycle in March, the Bank of Japan has also continued to maintain an easing policy. This widening monetary policy divergence has led to a continuous decline in the yen exchange rate this year. The only central bank in the world still sticking to a policy of negative interest rates, the Bank of Japan's dovish stance could send the troubled yen lower again. Last week, the Japanese government stepped up its verbal intervention in the fast-moving yen after the yen hit a 24-year low against the dollar. Japanese Finance Minister Shunichi Suzuki said that direct intervention is one of the options. If necessary, the intervention will be carried out quickly and without warning. "We do not rule out any options to deal with exchange rate fluctuations." As of now, the yen exchange rate has stabilized at the level of 143. Haruhiko Kuroda once said that the rapid depreciation of the yen is not desirable. But even after the yen hit a low of 145, the Bank of Japan still believes that as long as the pace of depreciation is stable, a weaker yen is good for the overall economy, according to people familiar with the matter, citing people familiar with the matter. According to media reports, Kyohei Morita, chief economist at Nomura Securities, said: The yen may break through 145, but simply selling the yen is tantamount to playing with fire. The difference this time is that traders will have to weigh Kuroda's accommodative stance against strong verbal warnings from Japan's foreign exchange officials. Kuroda has suggested that even attempts by the Bank of Japan to adjust policy in response to a falling yen would be largely futile. To stop the yen's decline, he said, sharp interest rate hikes would have to be done, which would devastate the economy during the pandemic. Japan needs strong wage growth to normalize policy through higher interest rates only if inflation is sustainable. Still, the BOJ's stance has come at an increasing price. While Japan has kept short-term interest rates at -0.1%, its 0.25% cap on 10-year Treasury yields is under intense pressure. A global bond sell-off pushed the yield to that ceiling last week for the first time since June. In just two days last Wednesday and Thursday, the Bank of Japan had to spend 1.4 trillion yen ($9.8 billion) on bond purchases to maintain that yield. BoJ officials said raising the ceiling on that yield would amount to a rate hike, essentially ruling out a rate hike until sustainable inflation emerges. Adjusting forward guidance on future rates would be an easier option should other surprises arise. Economists will also be watching the Bank of Japan's forward guidance this week, as nearly 80% expect the Bank of Japan to end the remainder of its special coronavirus aid program on schedule. The Bank of Japan is currently linking some of its policy guidance to the outbreak, so ending the program means the wording could change. However, analysts believe the Bank of Japan's key language on interest rates remains unchanged for the time being, keeping rates at current or lower levels. Why does the Bank of Japan insist on an accommodative stance?Wall Street News mentioned earlier that there are three main reasons why the Bank of Japan insists on continuous easing. First, inflation is relatively moderate. At present, most of Japan's inflation is rising due to the depreciation of the yen, and analysts believe that Japan's core CPI has increased from an absolute rate. It is not hyperinflation from a value perspective. The second is that the Japanese economy is still in a period of weakness, indicating that the underlying pressure on prices is still declining; the third is that the Japanese economy is not experiencing inflation - wages are "spiraling up", which means that consumers believe that the current high prices are only temporary, so they are not interested in inflation. The need for high wages is limited. UBS analysts Masamichi Adachi and Go Kurihara therefore said that combining these factors, the Bank of Japan will not change its easing policy until April 2023. This article is from Wall Street News, welcome to download the APP to see more |