Japan Monetary Policy May 2020


Japan: Bank of Japan ramps up policy response to Covid-19

May 28, 2020

At its monetary policy meeting ending on 22 May, the Bank of Japan (BoJ) once again dramatically loosened its monetary policy amid a deteriorating economic backdrop due to the coronavirus pandemic. However, the BoJ left the short-term policy rate on the current account balances of banks that it holds unchanged at minus 0.10%.

The BoJ announced it was bolstering its loan support program, which helps banks lend to businesses, particularly SMEs, at low interest rates. In sum, this program now amounts to JPY 75 trillion (around USD 700 billion), which is up from JPY 45 trillion (around USD 420 billion) previously. This highlights by how much the BoJ is willing to expand its policy toolkit during this unprecedented downturn, like many central banks around the world are doing.

In addition to expanded loan support, the BoJ announced it would directly purchase more corporate paper and bonds than usual until March 2021, which is later than the previously-announced deadline of September 2020.

The BoJ underlined that it would continue to not to set an upper limit on the amount of Japanese government bonds (JGB) it would purchase in order to cap the 10-year JGB yield at around 0%. Commenting on the implication of this commitment against a backdrop of rapidly increasing government spending and borrowing, Takashi Miwa and Masaki Kuwahara of Nomura said in a research note on 28 May: “Private-sector financial institutions pressed into providing cash flow support to businesses will have less capacity to purchase JGBs, so the BoJ may have an increasingly large role to play in buying up JGBs in the interest of keeping market interest rates stable.”

Regarding the outlook, the BoJ said it would “closely monitor the impact of Covid-19 for the time being and will not hesitate to take additional easing measures if necessary”.

Most analysts polled by FocusEconomics expect the BoJ’s short-term policy rate to remain at minus 0.10% through to the end of 2021. The 10-year bond yield is forecast to be at minus 0.05% at the end of 2020, before rising to minus 0.01% at the end of 2021. Panelists see the yen trading at 106.8 per USD at the end of 2020 and at 107.0 per USD at the end of 2021.

Author:, Economist

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Japan Monetary Policy Chart

Japan Monetary Policy April 20 20 1

Note: Monetary base in JPY trillion and 10-year bond yields in %.
Source: Bank of Japan (BoJ) and Refinitiv.

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