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Unchanged Monetary Policy Decision from Bank of Japan

July 15, 2020 By Mircea Vasiu

The Bank of Japan delivered its monetary policy decision in the previous Asian session, and it signals a no-change in the way it is conducting it. However, the details provided in the Monetary Policy Statement that accompanies this decision are remarkably interesting for the currency market trader. 

Moreover, the Outlook for Economic Activity and Prices, delivered at the same time with the Monetary Policy Statement, provides a glimpse into the realities of the Japanese economy during the COVID-19 crisis.

What’s New from the Bank of Japan?

With a majority vote of 8-1, Bank of Japan (BOJ) kept the Yield Curve Control (YCC) measures in place, albeit it retains the option of increasing its purchases on both the long and short-term of the yield, should it be the case. BOJ does not set an upper limit to the purchase of Japanese Government Bonds (JGBs) to ensure that the 10-year JGB yields will remain close to zero.

BOJ also continues to be an avid purchaser of both ETFs (Exchange Traded Funds) and REITS (Real-Estate Investment Trusts) at the pace of 12 trillion yen annually, respectively 180 billion yen. It also continues to buy corporate bonds.

In other words, the BOJ remains highly active in its program of QQE with YCC (Quantitative and Qualitative Easing with Yield Curve Control) and still aims at price stability around the 2% level.

How About the Japanese Economic Outlook?

The economy is expected to improve gradually, but only at a moderate pace due to the COVID-19 global pandemic. Moreover, the risks to economic activity and prices are skewed to the downside, also as a result of COVID-19.

Why does the BOJ monetary policy remain interesting even if it remains unchanged? The thing is that BOJ runs one of the most significant experiments in financial history – its balance sheet is on course to 120% of Japan’s GDP, with only Swiss National Bank exceeding it in size.

Also, BOJ’s active YCC policy serves as a possible model for other central banks to use, should current monetary policy tools prove insufficient to stimulate the economy. In particular, the Fed in the United States actively studies the YCC and the economic impact on the world’s largest economy.