Bank of Japan Surprises Markets With Policy Tweak

Japan, the world’s third-largest economy, has felt the sting of skyrocketing food and energy prices due to supply chain snarls and the war in Ukraine. Inflation, while much lower than in other parts of the world, was at 3.6 percent in October, putting a substantial burden on households that became accustomed to decades of price stability and wage stagnation.

Making matters worse is a weak Japanese yen. Earlier this year, the currency traded at a decades-long low against the dollar, placing even more price pressure on the economy, which is heavily dependent on imports.

The yen’s weakness has been exacerbated by the Bank of Japan’s insistence on sticking to ultralow interest rates even as other central banks around the world have precipitously raised their own in an effort to tamp down runaway inflation. The gap has devalued the yen as investors move money out of Japan in search of higher returns.

The currency has regained lost ground in recent weeks as other central banks have slowed their interest rate increases. It jumped in value after Tuesday’s announcement, rising by more than 3 percent. A surge in the currency’s value could help reduce inflationary pressures on the economy.

Mr. Kuroda has said that he would stick to the bank’s current rate policy until the bank achieves sustainable, demand-driven inflation of 2 percent, a level that policymakers argue would create a virtuous cycle of growing corporate profit and wages. While current levels have exceeded that target, the bank argues that the price increases are largely driven by supply constraints, not the heightened demand it aims to create.

In its statement, the bank said that it would maintain its current inflation target until it could be maintained in a “stable manner,” adding that it would “not hesitate to take additional easing measures, if necessary.”

Hisako Uenocontributed reporting.

Article source: https://www.nytimes.com/2022/12/20/business/japan-bank-yen-bonds.html