Mount Fuji, Japan

Japan Monetary Policy July 2021

Japan: Bank of Japan holds policy steady at July meeting; fleshes out measures to address climate change

At its meeting ending on 16 July, the Bank of Japan (BoJ) kept its monetary policy unchanged, as widely expected by market analysts. In terms of rates, the BoJ left the short-term policy rate for current accounts held by financial institutions at the Bank unchanged at minus 0.10%. It also continued to not set an upper limit on the amount of Japanese government bonds (JGBs) it will purchase in order to cap the 10-year JGB yield at around 0.00%. Regarding asset purchases, the Bank kept its buying commitments unchanged, including those of exchange traded funds, Japanese real estate investment trusts, corporate paper and corporate bonds.

The policy decisions came amid muted price pressures and an ongoing but fragile recovery. The Bank described the economy as still being in a “severe situation” due to the effects of the Covid-19 pandemic. As such, with a fourth state of emergency likely to constrain economic activity until its proposed end date of 22 August, the BoJ felt that it had grounds to take a wait-and-see approach. Moreover, following the announcement at the June meeting that it will provide funding to financial institutions that are seeking to address issues arising from climate change, the BoJ provided a preliminary outline of the initiatives. These include interest-free loans to banks that boost green and sustainable loans, transition finance and the waiving of negative interest rates on current account balances held at the BoJ. The measures will begin some time this year and run until the end of March 2031 in principle.

Looking ahead, the BoJ reiterated its dovish tone in its communiqué, continuing to state that it will “closely monitor the impact of Covid-19 and will not hesitate to take additional easing measures if necessary”, while it also “expects short- and long-term policy interest rates to remain at their present or lower levels”.

Regarding future policy moves, Alvin Liew, senior economist at United Overseas Bank, commented:

“July’s policy inaction and the updated inflation outlook did not change our view that the BoJ will not be tightening anytime soon and will maintain its massive stimulus in the next few years, possibly at least until FY 2023. Markets are increasing convinced that the BoJ has reached the end of the line on normalization and will remain in a holding pattern on policy until at least April 2023 when Governor Kuroda is scheduled to leave the BoJ. Attention for the BoJ is now likely shifted to dealing with the long-term climate change issue as the Central Bank starts fleshing out key measures for its green strategy”.

The next monetary policy meeting is set to end on 22 September.

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