Japan’s central bank left interest rates unchanged last week despite rising inflation, but suggested that it could gradually discontinue years of ultra-cheap money, sending the yen soaring and stocks tumbling.
The Bank of Japan (BOJ) said it kept unchanged its short-term interest rate at minus-0.1% and maintained its target for the yield on 10-year government bonds at around 0%.
But the central bank of the world’s third-largest economy also noted that it would employ a more flexible stance to controlling the yield on government bonds, which affects borrowing costs, “diluting a key pillar of its long-standing ultra-loose monetary policy,” as an analyst on CNN recently said.
With Japanese inflation now at 4.2%, there are growing calls, perhaps unsurprisingly, for the BoJ to tighten monetary policy much faster.
For instance, the sooner the BoJ moves to a “more normal structure and let bond markets, equity markets do their work that they need to do,” the better it will be for financial markets, Kevin Hebner, global investment strategist at TD Epoch, told CNBC’s Squawk Box Asia on Monday.
However, instead of rushing to increase interest rates, the Bank of Japan should focus on complementing its monetary policy with clearer fiscal plans, as advocated by Prime Minister Fumio Kishida’s government.
Enhancing worker productivity and supporting innovation in the private sector would be instrumental in achieving sustained wage growth, aligning with the 2% target.
However, the current debate in Japan primarily revolves around the government’s inclination to raise defense spending and fund it through methods like the potential sale of shares in telecoms company NTT, which can be seen as mere gimmicks.
If Japan is indeed approaching sustainable inflation levels and is getting closer to achieving its target, it is crucial for the government seriously to consider implementing a fiscal policy that aligns with this economic environment.
While the BoJ governor’s initiatives may have shown promising results, it’s essential now to recognize that the Bank of Japan cannot tackle this challenge singlehandedly.
Collaborative efforts between the government and the central bank are necessary to ensure the success of any economic measures aimed at maintaining stable and on-target inflation.
Nigel Green is founder and CEO of deVere Group. Follow him on Twitter @nigeljgreen.