• SHARE

In a furious attempt to keep interest rates down while simultaneously acknowledging signs of economic growth, the Bank of Japan said Friday it will increase the maximum amount of money it means to pump into banks.

The central bank rephrased its target balance of banks’ current accounts held at the BOJ to “around 27 trillion yen to 32 trillion yen” from “around 27 trillion yen to 30 trillion yen.” The actual amount is expected to be around 30 trillion yen, the BOJ said.

An improved economic outlook and optimistic gross domestic product projections have financial markets asking if and when interest rates will start to rise. Central bankers are struggling to quell those expectations.

Friday’s move follows a string of assurances by central bankers that Japan remains mired in deflation and that it is not yet time for the BOJ to reverse its policy course by tightening money.

“The BOJ is stepping on the accelerator and the brakes at the same time,” said Hideo Kumano, senior economist at Dai-Ichi Life Research Institute Inc. “But long-term interest rates will not be quelled. You simply cannot override demand” for stocks.

In textbook economics, economic recovery accompanies a rise in long-term interest rates as money flows away from bonds to stocks.

Short-term interest rates have been forced down by the BOJ’s super-easy monetary policy. Long-term interest rates, however, have fluctuated since September, with the benchmark 10-year government bonds showing yields between 1.3 percent and 1.7 percent.

When long-term interest rates rise, interest rates on housing loans and loans to businesses rise as well, dampening growth.

“We have never once indicated that deflation is anywhere near an end or that the exit is near,” BOJ Gov. Toshihiko Fukui said. “Our move today is to make sure the seeds of recovery turn into certain growth.”

He said the BOJ will not reverse course until consumer prices register positive year-on-year increases over several months, Policy Board members forecast positive consumer prices, and “so long as we believe quantitative easing to be necessary.”

Fukui dismissed speculation that the BOJ will abandon its quantitative easing stance due to recent signs that deflation is slowing. Consumer prices posted a year-on-year decline of only 0.3 percent in August, helped by an increase in the cigarette tax and medical costs shouldered by patients.

The governor denied that the yen’s surge relative to the dollar was a strong factor in Friday’s decision.

While the yen’s recent strength relative to the dollar is a cause of concern, as Japan’s nascent recovery is predominantly driven by exporters, Fukui said the central bank was paying more attention to the fundamental strength of the economy.

“It is true that monetary easing logically tends to weaken the yen,” he said. “But our decision today is to prepare us for new risks that will materialize as the economy moves forward.”

In a time of both misinformation and too much information, quality journalism is more crucial than ever.
By subscribing, you can help us get the story right.

SUBSCRIBE NOW