Bank of Japan Shocks Financial Markets—but Will It Affect Global Economy?

Bank of Japan Shocks Financial Markets—but Will It Affect Global Economy?
Bank of Japan Governor Haruhiko Kuroda speaks at a news conference in Tokyo, on Dec. 19, 2019. (Kim Kyung-Hoon/Reuters)
Andrew Moran
News Analysis
The Bank of Japan (BoJ) shocked Asian financial markets on Dec. 20 when it widened caps for a benchmark government bond yield. 
The central bank announced that it would permit the yield curve on the 10-year Japanese government bond to range 50 basis points to either side of its zero percent target (pdf). That’s up from the previous limitation of 25 basis points. 
Officials modified the conduct of the yield curve control to “improve market functioning and encourage a smoother formation of the entire yield curve, while maintaining accommodative financial conditions.” The BoJ refrained from referencing anything related to inflation. 
In other policy directives, the central bank left the benchmark interest rate unchanged at negative 0.1 percent (pdf). The institution plans to increase the amount of government bond purchases to 9 trillion yen ($68.1 billion) from 7.3 trillion yen ($55.2 billion). The BoJ also intends to buy 10-year bonds at 0.5 percent every business day through fixed-rate purchase operations.   
BoJ data show that the central bank owns more than 50 percent of all outstanding Japanese government bonds. 
A man walks past an electric monitor displaying the Japanese Nikkei share average in Tokyo on Oct. 14, 2022. (Issei Kato/Reuters)
A man walks past an electric monitor displaying the Japanese Nikkei share average in Tokyo on Oct. 14, 2022. (Issei Kato/Reuters)
Investors reacted negatively to the news, with the Nikkei 225 Index plunging nearly 670 points, or 2.46 percent. The Hang Seng Index tumbled 1.33 percent, while the Shanghai Composite Index dropped by more than 1 percent. U.S. stocks slumped at the opening bell but rebounded to finish the session higher. 
Bank of Japan Gov. Haruhiko Kuroda, who’s scheduled to step down in April, introduced the previous caps in September 2016. The objective was to lift inflation closer to the central bank’s 2 percent target rate amid tepid economic growth and stagnating inflation.  
Kuroda’s actions may prove to be beneficial for Tokyo, according to Michael Ashley Schulman, chief investment officer and a founding partner of Running Point Capital Advisors. 
“Higher bond rates will help strengthen the yen, may incentivize more Japanese money to either return to or remain in Japan, and globally, from a macro perspective, may induce some marginal selling of risky assets,” he told The Epoch Times. 
“To a degree, this move is a relief to see because next April, Kuroda will depart the BoJ after a decade at the helm of a low-interest-rate policy that led Japan (and the world) toward easy money. My assumption had been that it would be up to the next central bank governor to deal with a weak currency and inflation in the world’s third-largest economy. Kuroda’s recent move will make the transition to a new BoJ governor much easier and aid long-term market stability.” 
An increasing number of economists now anticipate that the BoJ will remove its negative interest rate policy. 
The annual inflation rate for November will be released on Dec. 22. It’s expected to rise to 3.9 percent, while the core inflation rate, which eliminates food but includes energy costs, is forecast to climb to 3.7 percent. 
So, what does the BoJ’s decision mean for the global economy?  

Good or Bad for International Markets? 

Tokyo had been one of the last major holdouts on the tightening front, as policymakers have tried to prevent a recession and stimulate the economy. In recent months, there has been a growing chorus of economists penciling in an economic downturn in 2023. A recent Reuters poll of market analysts suggested a 1.1 percent annualized contraction for the third quarter in Japan. 

Should Japan follow other nations and tighten monetary policy, that could weigh on growth prospects, which might have a ripple effect because Japan is the world’s third-largest economy.

Despite the initial decline in the financial markets, market experts think the BoJ’s actions could result in positive implications for the United States and other developed markets, particularly in the worldwide inflation fight. 
“When major central banks tighten their policies simultaneously, it can help to reduce global inflationary pressure and may allow the U.S. Federal Reserve and the European Central Bank to raise rates less in order to lower inflation,” Tadrus Capital CEO Mina Tadrus told The Epoch Times. 
At the same time, the hawkish move could also lead to higher commodity prices, possibly offsetting some of the inflation gains in recent months. 
“Sometimes when it comes to the oil market, it doesn’t do any good to pay attention to current supply and demand because global central banks can change the rules whenever they want. By changing the rules, they can change the value of the currency and the value of the overall commodity,” Phil Flynn, an energy strategist and author of The Energy Report, said in a note on Dec. 20. 
The U.S. Dollar Index (DXY), which measures the greenback against a basket of currencies, weakened by nearly 1 percent and fell below 105.00 following the news. That’s beneficial for dollar-denominated commodities because a weaker dollar will make things such as crude oil and gold cheaper for foreign investors to purchase. 
At the same time, the Japanese yen strengthened to a four-month high against the U.S. dollar. The yen has plummeted about 15 percent against the greenback this year. 
Ultimately, the BoJ’s surprise move may result in even more volatility and uncertainty heading into next year. Before the announcement, a Reuters poll of analysts expected the Nikkei to rally 6 percent by the middle of 2023 amid lower interest rates and peaking inflation. Will they stick to the same call in a follow-up survey?
Andrew Moran has been writing about business, economics, and finance for more than a decade. He is the author of "The War on Cash."
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