The Bank of Japan’s headquarters in Tokyo, June 17, 2022.
Photo:
KIM KYUNG-HOON/REUTERS
Japan’s yen traded at 115 to the U.S. dollar in January 2022. By mid-October, the yen had shed 23.3% of its value. A Financial Times headline that month identified what everyone decided was the culprit: “Fumio Kishida backs Bank of Japan’s ultra-loose policy despite yen plunge.” Prime Minister Kishida was supporting the Bank of Japan’s policy of suppressing long-term yields on government bonds to interest rates near zero. This is the bank’s much-advertised, unorthodox “yield-curve control” policy, or YCC, and it put Japan at the center of a great monetary-policy fallacy.
That policy was altered on Dec. 20, when the bank announced it was widening the trading band for government bonds. This tweak provoked reaction around the world. Was Japan, the world’s largest creditor, going to abandon its ultra-loose monetary policy and take the lid off interest rates?
The question sent analysts, markets and the financial press into a tizzy. The government bonds sold off, and the yen soared. Bank of Japan Gov.
Haruhiko Kuroda,
however, made clear that it was only a tweak. As he put it: “This measure is not a rate hike. Adjusting the YCC does not signal the end of the YCC or an exit strategy.” With that, traders calmed down and concluded that Japan’s ultra-loose monetary policy would stay put.
But the interpretation of Japan’s monetary policy as “ultra-loose” is wrong. Tokyo has endured ultra-slow monetary growth for decades. From the bursting of Japan’s financial bubble in 1992 to the onset of Covid in 2020, the growth rate of the country’s money supply has averaged an anemic 2.6% per year. Today it hovers close to that rate, at 3.1%. Accordingly, Japan’s inflation rate has averaged an almost imperceptible 0.3% a year. Ultra-slow money growth has produced ultra-low inflation and ultra-low bond yields.
The commentators have clearly forgotten…
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