Dec 20, 2022 - Economy & Business

What the Bank of Japan's surprise means for the world

Illustration of the Yen symbol combined with an upward pointing arrow

Illustration: Annelise Capossela/Axios

This has been a year in which all the world's major central banks engineered a massive pivot toward higher interest rates and tighter money. Almost all, that is.

  • Until last night (Tuesday morning Tokyo time), the Bank of Japan was the exception to the rule.

Driving the news: In a surprise move, the central bank loosened its "yield curve control" that capped long-term interest rates on 10-year Japanese government bonds at 0.25%. That cap is now 0.5%.

  • Japanese rates will remain low, but the action signaled that, after two decades of trying mightily to coax inflation higher, even Japan sees a changing balance of risks.
  • The move sent the yen soaring by about 4% against the U.S. dollar in early trading, a massive jump for one of the world's most important currency pairs. It also made for bumpy trading in global bonds and stocks.

Why it matters: The hawkish pivot is a fitting end to a year featuring a momentous shift in the underpinnings of global monetary policy. It is a sign that the war on inflation is truly a worldwide affair.

  • It helps the U.S.: When major central banks all tighten policy simultaneously, it helps reduce global inflationary pressure.
  • Tighter money from the BoJ means the Federal Reserve and European Central Bank, all else equal, don't need to raise rates quite as much to lower inflation.

State of play: Japan entered a cycle of slow growth and falling prices a quarter-century ago. It has been at the forefront of using unconventional policy, including negative interest rates and quantitative easing, to boost inflation.

  • Those efforts accelerated in 2013 under prime minister Shinzo Abe and BoJ governor Haruhiko Kuroda, as they set out to jolt Japan from its malaise.
  • Even over the last 18 months, Japanese inflation has remained subdued, reflecting the deep undertow of deflation.
  • That's why the BoJ has kept its target interest rates negative and capped longer-term bond yields, even as the rest of the world tightens.

Kuroda's term is up this spring after a decade in the job; it appears he is setting up a transition to offer his successor greater policy flexibility.

What they're saying: "In addition to the upward revision of the outlook for the domestic economy in the statement, Governor Kuroda also indicated … rising momentum of higher wages and inflation," Ayako Fujita, a senior economist with JPMorgan Chase, wrote in a research note.

  • "We think this is a signal that the BoJ is becoming slightly more confident about achieving the target inflation in a stable manner," Fujita added, calling the move "the first step toward policy normalization."

The bottom line: As 2022 ends, the world's major central banks are all working together to lower inflation.

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