TOKYO, Dec. 21, 2022—As virtually the only central bank in the world that has staunchly kept interest rates at zero for nearly 20 years, the Bank of Japan prided itself as the driver of getting Japan out of deflation and guiding inflation above 2 percent. The bank went too far and long, igniting inflation close to 10 percent year-on-year that consumers argue is as high as 30-40 percent. On Dec. 20, BOPJ governor Haruhiko Kuroda raised the bank’s yield curve control target to 0.5 percent from 0.25 percent. It’s the first time that the bank raised the target rate in more than 20 years, and it’s a de facto Kuroda capitulation to consumer and business outcries about soaring prices, which even pro-establishment Liberal Democratic Party politicians of PM Fumio Kishida, whose voter support is sagging to record-lows, cannot oversight anymore as the country heads toward 2023 spring local general elections.
The BOJ shocker unsurprisingly is having a big impact on financial markets around the world: The yen soared, Japanese government bond prices plummeted, and the U.S. dollar’s stand-alone rise against all key currencies was checked. But among many consequences, one impact looms large: the cost rise dreaded by the Ministry of Finance that must refinance the Japanese government debt, now close to $10 trillion, as a mere percentage point translates into more than $10 billion cost increase that needs to be budgeted over coming years.
This refinancing cost increase comes at a time when the Kishida cabinet is gearing to double Japan’s defense budget to 2 percent of GDP from 1 percent with a combination of raising taxes, reducing pensions and public services, and selling new JGBs, the last item at a far more elevated cost than when MoF had been issuing JGBs at near zero percent.
And everyone, including amateur investors know, that once a central bank tweaked monetary policy, the move goes on until the market says ‘enough,’ so by the time Kuroda exists as BOJ governor, another yield curve control might be possible.
###
Insight Into the Future