Skip to main content

The Globe and Mail

Where is Japan’s monetary policy headed?

A pedestrian passes an electronic stock board in Tokyo, June 5, 2013, as Japan’s Nikkei 225 index tumbled, registering disappointment with a lack of detail in Prime Minister Shinzo Abe’s unveiling of the third plank of his so-called Abenomics program intended to rouse a long-stagnant economy.


Now that the brief "Abenomics" honeymoon appears to be waning – at least in the financial markets – the spotlight will be back on the Bank of Japan this week as policy makers convene for their monthly two-day meeting starting Monday.

Investors will be watching closely to see if the central bank responds to recent turmoil in the bond market that has driven up yields and caused considerable pain for the financial sector, as well as a sharp selloff in the previously soaring equity market that is taking a toll on public confidence. But the markets shouldn't expect much of a reaction from monetary authorities, despite concerns expressed by some members of the bank's policy-setting board that rising borrowing costs could undercut efforts to restore confidence, revive lending and weaken the value of the yen.

"We don't expect the board to be panicked into any major policy changes," Julian Jessop, chief global economist with Capital Economics in London, said in a note. "We suspect that the … board will take a relatively sanguine view of the slump in Japanese equities, too."

Story continues below advertisement

Newly appointed Bank of Japan governor Haruhiko Kuroda launched a radical shift to loosen monetary policy at his first meeting in April, part of the government's much-ballyhooed strategy to combat debilitating deflation, boost exports and breathe life into the ailing domestic market. The bank embarked on aggressive quantitative easing to double Japan's monetary base, quadruple its purchases of Japanese government bonds and expand the types of other assets it could acquire.

Mr. Kuroda signalled that the bank would continue pouring unprecedented amounts of fuel into the financial system – including buying ¥7.5-trillion worth of long-term Japanese bonds a month – for as long as it takes to reach an inflation target of 2 per cent annually.

The moves were initially cheered by the markets. But it didn't take long for worries to creep in about the ability of Prime Minister Shinzo Abe's government to launch major spending programs, keep its promises of extensive reforms to foster growth and yet rein in soaring public debt that has reached almost 250 per cent of GDP.

At most this time around, the central bank will consider tweaking "some technical [money-market] operations to help the banking system, which got a bit of a shock from the jump in bond yields," said Avery Shenfeld, chief economist with CIBC World Markets in Toronto. The banks hold such large amounts of government debt that even small increases in yields can trigger heavy losses. To cushion such a blow, the Bank of Japan could extend the maturities of low-interest loans. It could also seek to shore up market sentiment by moving up plans for other asset purchases, adding equity ETFs and Japanese real estate investment trusts to its ballooning balancing sheet.

Mr. Kuroda could also resort to jawboning, an old favourite of central bankers everywhere. But his early efforts on that front have sparked only more confusion. The jump in bond yields would not hurt the economy, he insisted at a press briefing on May 22. But he also promised action to stabilize the market.

"The Bank of Japan is going to be quiet [in terms of policy moves] … and simply say that's it done pretty much all that it's going to do," said Carl Weinberg, chief economist with High Frequency Economics in Valhalla, N.Y.

On the equity front, the bank can be expected "to throw words at the market," Mr. Weinberg said. "I don't think they have any arrows to take out of their quiver and toss in that direction. The expectation was that printing a ton of money would improve the stock market, and clearly that expectation isn't working out."

Story continues below advertisement

Report an error Editorial code of conduct Licensing Options
As of December 20, 2017, we have temporarily removed commenting from our articles. We hope to have this resolved by the end of January 2018. Thank you for your patience. If you are looking to give feedback on our new site, please send it along to If you want to write a letter to the editor, please forward to