Bank of Japan Maintains Ultra-Low Rates Despite Yen’s Rapid Fluctuations

Japanese 10,000 yen bank notes spread out at an office of World Currency Shop in Tokyo on Aug. 9, 2010. (Yuriko Nakao/Reuters)

The Bank of Japan (BOJ) said on Friday that it would keep monetary easing and ultra-low interest rates in place, despite the rapid fluctuations of the yen, which fell to 134.04 yen per dollar on Friday.

The BOJ said after its policy meeting ended on Friday that it would retain short-term interest rates at -0.1 percent while guiding the 10-year government bond yields to around 0 percent, Kyodo News reported.

The bank also decided to keep the upper limit at 0.25 percent for its unlimited fixed-rate bond-buying operation, which currently covers 10-year bonds.

Analysts had widely anticipated the move. The BOJ remained steadfast in its assessment that Japan’s economy was impacted by the COVID-19 pandemic and a rise in commodity prices.

“It is necessary to pay due attention to developments in financial and foreign exchange markets and their impact on Japan’s economic activity and prices,” the bank said.

The U.S. Federal Reserve raised its interest rate by 0.75 percent on Wednesday, the largest increase since 1994 and the third increase this year, to counter the country’s inflation.

The dollar index, which measures the currency against six peers including the yen, rose 0.23 percent to 104.12, after slipping to the lowest since June 10 at 103.41 overnight. It was at a two-decade high of 105.79 prior to the Fed decision.

The greenback was up 1 percent to 133.63 yen following a lot of volatility in the immediate aftermath of the BOJ’s decision. Initially, it extended gains to as much as 1.89 percent to reach 134.64, then plunged back momentarily by two big figures to 132.42, before snapping higher to current levels.

Yuichi Kodama, chief economist at the Meiji Yasuda Research Institute, said the BOJ is unlikely to change its policy to respond to “cost-push inflation,” which it views as only transitory, Kyodo News reported.

“It is now in a bind,” Kodama said. “A weak yen boosts exports but hurts private consumption. On balance, its impact may not be so negative in terms of gross domestic product because exports play a big role.”

Unlike other major central banks, which are flagging aggressive interest rate hikes to tackle inflation, the BOJ has committed to monetary easing and maintaining low-interest rates, resulting in the depreciation of the yen.

BOJ Governor Haruhiko Kuroda explained last week that Japan’s economy is still recovering from the downturn brought on by the COVID-19 pandemic and has been under downward pressure from the income side due to rising commodity prices.

“In this situation, monetary tightening is not at all a suitable measure. The top priority for the Bank is to persistently continue with the current aggressive monetary easing centered on yield curve control and thereby firmly support economic activity,” Kuroda said.

“Unlike other central banks, the Bank has not faced the trade-off between economic stability and price stability. For this reason, it is certainly possible for the Bank to continue stimulating aggregate demand from the financial side,” he added.

Reuters contributed to this report.