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  • 09-04-23

    QNB Analyzes Bank of Japan's Monetary Policy Pivot

    (MENAFN) Qatar National Bank (QNB) has identified rising inflation as one of the biggest macro-economic challenges facing policy makers and central bankers globally. The combination of excessive policy stimulus, direct transfers to households, and persistent supply constraints has led to a significant spike in global prices over the last year. As a result, major central banks such as the US Federal Reserve and the European Central Bank have implemented aggressive monetary policy tightening cycles involving interest rate hikes and the reversion of balance sheet expansion programs.

    In contrast, the Bank of Japan (BoJ) has been moving at a significantly slower pace. Despite the recent monetary "hawkishness" or urgency to tighten policy of its peers in the US and Europe, the BoJ still relies on unconventional measures such as negative interest rates, broad-based asset purchases, and yield curve control targets that cap long-term rates at low levels.

    However, in late December 2022, BoJ officials decided to depart from radical, ultra-easy monetary policy and made a soft-touch tweak to the policy target for the 10-year Japanese government bond (JGBs) yield. The ceiling was raised from 25 basis points (bps) to 50 bps in response to above target and accelerating inflation, as well as pressures from rapid monetary tightening moves in other parts of the world. This decision came as a surprise to market participants, triggering an immediate repricing of local bonds to levels not seen in years.

    Investor speculation followed, with some believing that this was only the beginning of a more aggressive tightening cycle and that authorities would soon let go of yield controls altogether. To sustain the new 50 bps target for 10-year JGBs, which were challenged by speculation that yields would increase further, the BoJ had to deploy JPY 19 trillion (USD 4.5 trillion) in asset purchases in January 2023. This was the largest amount of Japanese monthly asset purchases on record, surpassing the heights of the Covid-19 pandemic in July 2020.

    The winds of change continued to blow as the Japanese government announced Kazuo Ueda as the upcoming governor of the BoJ in February 2023, after the ten-year tenure of Haruhiko Kuroda, which formally ends next week. While the "change of the guard" was anticipated by most analysts, it adds to the speculation about the new directions of the institution.

    In QNB's view, three factors support the idea of a long but steady march to less easing and more monetary policy normalization under the new leadership of the Bank of Japan. First, the "change of the guard" marks the beginning of a new policy era for the BoJ. Haruhiko Kuroda, the outgoing governor, was one of the main architects of the "Abenomics," the economic policy signature approach of the former Prime Minister Shinzo Abe. Kuroda championed "dovish" policies and positions, and his exit stirs the debate about a more significant "hawkish" policy pivot, albeit relatively modest, slow, and controlled when compared to what happened in the US and Europe.

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