YEN SINKS FURTHER AS JAPAN’S GOVERNMENT ANNOUNCES $197 BILLION STIMULUS

At its meeting last week, the Bank of Japan (BoJ) held its key interest rate at -0.1 percent, made no changes to its program of bond purchases, and continued to cap the yield on 10-year bonds at zero percent, as predicted by 49 economists Bloomberg had polled.

The news did nothing to raise the yen’s value, which sank to a three-decade low late last month.

The bank’s decision swiftly followed an announcement by prime minister Fumio Kishida that the government would issue a second round of stimulus equivalent to $197 billion to help households cover rising food costs and pay inflated heating bills that have risen as the yen’s value has crumbled.

Inflation in Japan ran at 3 percent in September, an eight-year high.

The new round of stimulus spending will shave 1.2 percentage points off that rate, Kishida said, and would boost GDP by 4.6 percent, but he gave no time frame in which that gain will occur.

The BoJ had predicted that inflation would peak at 2.9 percent this year, then fall to 1.6 percent in 2023, below the BoJ’s 2-percent target.

“The outlook report shows inflation between 1 and 2 percent for 2023 and 2024,” bank governor Haruhiko Kuroda said at a press briefing after the bank’s policy committee met. “At the moment, we don’t see a rate hike coming or an exit from [current] policy.”

“The likelihood of the BoJ tightening policies is still small, as Japan’s inflation is not broad-based and is rising at only a third of the pace in Europe and the U.S.,” Kyohei Morita, chief Japan economist at Nomura Securities, told Bloomberg.

The yen closed at ¥148.65 on 31 October.

TREND FORECAST: As we noted in “Bank of Japan Intervenes to Prop Up Yen” (27 Sep 2022), Japan’s central bank is walking a thin line. The country’s population is among the world’s oldest, leaving millions of citizens on fixed incomes vulnerable to rising interest rates. However, inflation creates an equal vulnerability: Japan imports most of its raw materials, including fossil fuels. 

With inflation soaring in Europe and the U.S. and with more central banks raising interest rates, we maintain our forecast that the BoJ will be forced to raise interest rates despite the bank’s current policy.