TOKYO, Jan. 18, 2023—The Bank of Japan, the Japanese central bank, Jan. 18, 2023 decided to keep short-term interest rates at 0.5% and continue accommodative monetary policy, dispelling speculation for a further tightening following its December 0.25% rate hike. The latest policy action underscores that its governor, Haruhiko Kuroda, is finding himself trapped, having no alternatives other than continuing the easy monetary policy, which one day would show up as nasty inflation.
Kuroda, who has been in his position for far too long, since March 2013, adopted the zero-rate policy right after his appointment, when the central bank held about 12 percent of aggregate Japanese government bond issuance at the time. Under his policy, the bank’s hold of the total JGB issuance quadrupled over the past 10 years and in the July-September 2022 quarter, topped 50 percent of the total to 50.3% of the total JGB issue balance of 1,066 trillion yen. Including short-term bills, the ratio was 44.9 percent. In the quarter, insurers and pension funds followed with 22.2% and banks and financial institutions 11.2%.
Kuroda came from the Ministry of Finance, which issues JGBs. The ministry is concerned about any blip in interest rates because even a 1% rise amounts to 10 trillion yen in fresh spending. So it is implicitly telling Kuroda to keep rates artificially low, disregarding calls for raising rates to historically healthy levels from the public sector.
The central bank’s huge JGB holding means that interest rate rises mean the bank incurs investment losses if it sells pre-maturity JGBs, the reason why it is entrapped in its cold JBG bath. The bank also may be forced to sell before maturity if unpredictable developments take hold in the financial market – such as soaring rates – and if it holds on to them until maturity, it may take a hit.
The U.S. federal debt ceiling currently is $31 trillion. U.S. Treasury securities are smoothly sold in regular auctions as they bear reasonable coupon rates. The MoF meanwhile is experiencing slow bidding for JGBs from banks because of low coupon rates. Banks are murmuring that if JGB rates continue this low, they may not be able to keep on buying. If they fail to buy, that could be a tigger for interest rate spiral.
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