At the BOJ Monetary Policy Meeting held on 19-20th, the BOJ decided to modify its large-scale easing policy. It will increase the allowable volatility of the longterm rate to 0.5%, which was previously set at around 0.25%. It shall apply from 20th. The long-term rate is currently near the upper limit of its fluctuation range, effectively raising the interest rate. This is the first time since March 2021 that the fluctuation has been increased from 0.2% to 0.25%.

President Haruhiko Kuroda will hold a press conference on the afternoon of 20th to explain the decision.

As foreign central banks moved to raise interest rates due to historic inflation, upward pressure on Japanese government bond interest rates also intensified. The BOJ has been artificially suppressing the LONG-TERM rate with its monetary policy, but there have been concerns about a decline in market functioning.

The BOJ has decided to expand the allowable fluctuation range of the longterm rate from 0% to plus/minus 0.25% to about 0.5% as “If this situation continues, it will have a negative impact on the financial environment, including the issuance of bonds by corporations.” The Negative interest rate policy, exchange-traded fund (ETF) purchase policy, and forward guidance on the policy rate were left unchanged.

The BOJ will increase its purchases of long-term JGBs from 7.3 trillion yen per month to about 9 trillion yen per month (announced on the same day). The plan is to change the format to indicate the amount of money to be purchased in the form of a range, so that the amount of money to be purchased can be determined more flexibly. The yield on the “continuous fixed-rate bond-buying operation,” in which an unlimited number of 10-year bonds are purchased each business day at a yield of 0.25%, will also be raised to 0.5%.

The BOJ began its massive easing program in 2013, shortly after Governor Haruhiko Kuroda took office, with the goal of “The price stability target of 2% will be realized as soon as possible, with a time frame of about two years in mind.” The BOJ has set a policy of doubling its holdings of JGBs and ETFs in two years with the aim of doubling the amount of money it supplies to the world.

However, the price stability target has been missed due to factors such as an increase in sales tax and a decline in energy prices. In 2016, the policy target was switched from the monetary base to interest rates in a comprehensive review. At that time, it introduced yield curve control (short- and long-term interest rates manipulation), which guided short-term interest rates to minus 0.1% and the yield on the 10-year JGB, the benchmark for the longterm rate, to around 0%.

The aim was to return the policy target from quantity expansion to interest rates in order to keep monetary easing in place longer. Subsequently, the BOJ has gradually expanded the allowable range of fluctuation of the long-terminals rate from 0.1% to 0.25%.

When the US and Europe moved to raise interest rates to curb inflation, upward pressure was also applied to Japan‘s longterm rate, but the increase in the allowable range has held down interest rates in the market as “It would effectively raise interest rates, which isn’t good for the Japanese economy.” However, the yen’s depreciation temporarily accelerated to the 151-yen-per-dollar range in October against the backdrop of differences in the direction of monetary policy between Japan and the United States.

Initially, the BOJ took the position that a weaker yen would be positive for the Japanese economy, but the negative impact of sharp fluctuations in exchange rates on business activity cannot be ignored. The current rate of increase in consumer prices is in the mid-3% range. The price stability target of 2% set by the government and the Bank of Japan had been exceeded.

The depreciation of the yen has spurred the appreciation of resources, and the composition of price hikes in a wide range of items, including electricity rates and fresh food, is becoming clearer. The decision to effectively raise interest rates will narrow the interest rate differential with foreign countries and is expected to have the effect of reducing sharp fluctuations in the foreign exchange market.