On the 20th, the Bank of Japan decided to revise the current large-scale monetary easing measures and raise the upper limit of the fluctuation range of long-term interest rates from about 0.25% to about 0.5%.
The yen's appreciation against the U.S. dollar accelerated as market perception spread that this was a de facto monetary tightening.
We asked three US experts about this policy modification.
"The first step to end long-term interest rate manipulation"
First is William Dudley, former vice chairman of the Federal Reserve Board's monetary policy meeting and president of the New York Federal Reserve Bank.
Q. How do you perceive the Bank of Japan's policy revisions?
A. The timing is somewhat unexpected and a surprise.
Firstly, it will reduce the interest rate differential between Japan and the United States, and secondly, it will be perceived as sending a signal that the Bank of Japan is confident of progress toward its 2% inflation target, triggering a sharp appreciation of the yen. is what happened.
Q. Why do you think you decided to fix it?
A. There are many factors, including the fact that prices are rising in Japan as well, and that the Bank of Japan will have to purchase more and more government bonds if it tries to keep interest rates at the current level.
My understanding is that there is already a distortion in the market for buying and selling government bonds and a twist in short and long term interest rates.
I think this revision is a good first step to end the "long-term interest rate manipulation," which sets targets for long-term interest rates in addition to short-term interest rates called YCC.
``Interest rate hike will start in the second half of next year at the earliest''
Next is Professor William Grimes of the Paldi School of Boston University, who is familiar with monetary policy in Japan and the United States.
Q. How do you see the Bank of Japan's monetary policy revision?
A. It is an essential first step toward the normalization of the Bank of Japan's long-term monetary easing, that is, the reduction of quantitative easing and the increase in short-term interest rates.
I think that the initial stage of quantitative tightening has become visible with this revision, but the speed will be gradual.
The Bank of Japan will only raise short-term interest rates when it sees no danger of a recession, but not until the second half of 2023 at the earliest.
“Possibility of further acceleration of yen appreciation”
Finally, we spoke to Edward Al-Husseini, senior analyst at the New York office of asset manager Columbia Threadneedle.
Q. Did the New York market see this as a de facto monetary tightening?
A. Yes.
Markets saw the Bank of Japan as getting closer to breaking free from long- and short-term interest rate manipulation.
The foreign exchange market has seen a significant appreciation of the yen due to the monetary tightening and the surprising timing.
Q. Why do you think you decided to fix it at this timing?
A. I think there are two reasons.
One, as Governor Kuroda said, is to increase the volume of transactions and improve the functioning of the market now.
The functioning of the bond market was beginning to become significantly less efficient due to yield curve manipulation.
From the perspective of market functioning, it makes sense to widen the interest rate range for yield control in order to bring more liquidity and reduce the burden on the market.
Another thing that Governor Kuroda did not say is that I believe he is sending a strong message that the BOJ will soon end its interest rate manipulation.
Q. How do you see the yen exchange rate going forward?
A. I think the yen may appreciate even more than the 130 yen level to the dollar.
The yen has depreciated for most of this year.
Capital will begin to return to Japan from overseas following this decision.
With the Fed starting to slow its pace of rate hikes and the Bank of Japan just now sending out a tightening message, the policy trajectories of both sides are giving a strong boost to the yen.