Mount Fuji, Japan

Japan Monetary Policy March 2021

Japan: Bank of Japan leaves rates unchanged at March meeting; adjusts monetary policy following review

At its meeting ending on 19 March, the Bank of Japan (BoJ) kept its monetary stance unchanged against a backdrop of mild price pressures, while it also announced the results of its highly anticipated monetary policy framework review. All told, the adjustments from previous policy were relatively small, and as such the market response was muted.

The review prompted three key measures. Firstly, the Bank will establish the Interest Scheme to Promote Lending, which will provide incentives to financial institutions based on the absolute value of its short-term policy rate. This will enable the BoJ to “cut short- and long-term interest rates more nimbly while considering the impact on the functioning of financial intermediation”. Secondly, the Bank clarified that its tolerance range for fluctuations in the 10-year government bond yield would be plus or minus 0.25% from the target level, thus implicitly widening it from the previously assumed 0.20% band. Lastly, the BoJ announced it would maintain the Covid-19-motivated upper limits for purchases of exchange-traded funds (ETFs) and Japan real estate investment trusts (J-REITs) at JPY 12 trillion (around USD 110 billion) and JPY 180 billion (USD 1.6 billion) respectively, but removed its previous guidelines for recommended annual purchases.

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%.

The BoJ reiterated its dovish tone in its communiqué, stating that it will “closely monitor the impact of the novel coronavirus 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 the Bank’s policy review, Hiromichi Shirakawa and Takashi Shiono, economists at Credit Suisse, commented:

“[The] announcement did not contain any material surprises. Yet, it demonstrated a strong intension of the Bank to cap a rise in long-term interest rates. To be simple, the Bank is now ready to execute fixed-rate buying operations on an unlimited basis, which could last for a few consecutive days. We anticipate the Bank’s decision to introduce a new JGB buying operation likely to contribute to stability of JGB markets.”

Commenting on future policy moves, Alvin Liew, senior economist at United Overseas Bank, noted:

“Looking forward into the next MPM, we maintain our view for the BOJ to do more and enhance its monetary policy easing further, most likely through re-accelerating its JGB purchases and expanding its lending facilities to Japanese corporates and SMEs. While the external demand for Japan has been improving the domestic sector remains weak and its core CPI prices are still in decline at -0.4% y/y for February, well away from the elusive 2% target.”

The next monetary policy meeting is set to end on 27 April.

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