BoJ to Maintain Accommodative Monetary Policy

by: Steven Towns

In today's Wall Street Journal Asia print edition, Leika Kihara comments on the Bank of Japan's July meeting minutes in: Bank of Japan Favors Slow Pace on Rate Rises.

Minutes from the Bank of Japan's July monetary policy decision meeting in which the BoJ raised its short-term target rate to 0.25% -- ending five years of zero percent rate policy -- show that the decision was based on concern for creating an environment for achieving 'sustainable long-term economic growth accompanied by stable prices.' The BoJ acknowledged the balance between domestic and external demand in the "expanding" Japanese economy.

Its decision to maintain an accommodative policy in which rates are adjusted gradually as opposed to successively and its plans to continue purchasing government bonds at 1.2 trillion yen ($10.34b) monthly likely assuaged concerns government officials had about the BoJ acting in haste.

Comment: In hindsight, the BoJ's timing for ending its zero-interest-rate-policy in July seems to be working out as well as could have been hoped for. Japanese equities have even started to rally, regaining ground lost after a broad correction in May. In its August meeting, the BoJ voted unanimously to maintain its short-term target rate but effectively warned that another rate hike this year should not be ruled out. A subsequent WSJ article argues that a revision to Japan's consumer-price index should result in lower readings, thus reducing the possibility of a near-term rate hike.

Japanese stocks are increasingly favored over the nation's government bonds given the widening rate spread against JGBs in what is a rising global interest rate environment and the fact that recent economic data has been strong in Japan meaning a data-watching BoJ could be influenced to raise rates sooner, causing bond yields to rise and prices to fall.

Resources: BoJ's July meeting minutes (.pdf), Reuters coverage