On 9 April, the value of Japan’s yen slipped 1 percent against the dollar, falling as low as ¥133.4 after Kazuo Ueda, the Bank of Japan’s new governor, announced that the bank will maintain a -0.50-percent interest rate and continue to hold bond rates at rock bottom.
The yen continues to languish, closing at ¥135.13 on Monday, 17 April.
Investors had expected Ueda—a retired economics professor with a PhD from the Massachusetts Institute of Technology—would begin to shift from his predecessor’s policy to one more responsive to a world of inflation and rising interest rates.
However, “in light of current economic, price, and financial conditions, it is appropriate to maintain the yield curve control for now,” he said in a public statement.
Maintaining “yield curve control” means the central bank will continue to buy as many government bonds as necessary to ensure that yields on ten-year government securities do not rise above 0.50 percent.
The yen briefly plunged below ¥150 to the dollar last year as central banks around the world raised interest rates, drawing investment away from Japan.
Japan remains the only leading nation with a negative interest rate.
The country’s consumer price index rose by 4.2 percent in January, but settled back to 3.1 percent in February after the national government subsidized high energy prices. The index excludes the cost of fresh foods.
TREND FORECAST: Japan has one of the world’s oldest populations. The central bank is keeping interest rates low to protect millions living on fixed incomes.
The strategy may be popular but it also is a long-term loser.
For example, lacking domestic production, Japan depends on crude oil imports and it is the largest LNG buyer in the world. Thus, the lower the yen falls the more it will cost to import commodities and products which mean the higher inflation will rise.
Also, as inflation continues to rise, a 0.50-percent bond rate discourages foreign investment.
Also, the world’s sluggish economy is robbing Japan of crucial export revenues.
The country also has spoken of boosting defense spending through 2028 in the face of China’s growing assertiveness over taking back Taiwan.
Like the U.S. Federal Reserve, the Bank of Japan could find itself needing to raise interest rates quickly to stave off an impending crisis.
If that happens, the country will find itself much less able than Europe or the U.S. to weather higher borrowing costs without economic and political turmoil.