Mount Fuji, Japan

Japan Monetary Policy March 2020

Japan: Bank of Japan acts to buttress the economy

At an emergency meeting ending on 16 March, the Bank of Japan (BoJ) loosened its monetary policy to support the Japanese economy against a rapidly deteriorating global economic backdrop. Moreover, the economy is already suffering from existing headwinds such as the sales tax increase in October and depressed foreign demand for Japanese goods and services.

In a joint move with other central banks to reduce dollar funding pressures, the Bank of Japan announced the cost of U.S.-dollar-denominated lending in Japan would be lowered by 25 basis points. Moreover, the weekly lending provisions of this debt will now include debt with a maturity of 84 days, in addition to debt with a one-week maturity, which was already available.

The Central Bank unveiled a raft of measures to support businesses: It will offer one-year, zero-interest loans to banks as collateral against corporate debt, encouraging bank lending; raise purchases of commercial paper to JPY 3.2 trillion from JPY 2.2 trillion, boosting short-term liquidity for businesses; and increase purchases of corporate bonds, making corporate debt more affordable. In addition, the BoJ will double annual purchases of exchange-traded funds, raising them to JPY 12 trillion, and annual purchases of real estate investment trust securities, raising them to JPY 180 billion.

The short-term policy rate, which applies to current account balances held by financial institutions at the Bank of Japan, was left at minus 0.10%. Meanwhile, 10-year Japanese government bond (JGB) yields will continue to be capped at around 0% and the BoJ said it will continue to purchase JGBs at a pace of about JPY 80 trillion per year.

Looking ahead, the BoJ said it will “closely monitor the impact” of coronavirus on the economy and will “not hesitate to take additional easing measures if necessary”. It underlined its commitment to bringing core inflation above the 2.0% target.

Ma Tieying, economist at DBS, said: “Given the high degree of economic and financial market uncertainties, we think further easing remains likely in the months ahead. We continue to expect a 10bps cut in the short-term policy rate in 2Q20, which would be accompanied by counteracting measures to mitigate the side-effects on the banking sector.”

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