In Japan, Central Bank Still Wants Interest Rates Near Zero

With Japan starting a three-day weekend Friday, the central bank said it would buy an unlimited amount of recently issued 10-year Japanese government bonds at a fixed rate of 0.25% on Monday. Bond prices move in the opposite direction to yields, so the BOJ was telling any investors inclined to dump their bonds quickly at a low price that they could get a better deal Monday.

The BOJ’s message is that “it would be a waste to sell off during the weekend,” said Takahiro Sekido, a strategist at MUFG Bank and a former BOJ official.

The effect is to keep interest rates near zero in Japan, which the central bank believes is desirable because the economy is still struggling to overcome the pandemic.

“We need to continue current powerful monetary easing because inflation is expected to remain around 1% at the final point of our projection period” in March 2024,

Bank of Japan Gov. Haruhiko Kuroda

said at a news conference Jan. 18. He added, “We don’t expect to raise interest rates at all.”

The Bank of Japan acted after the benchmark 10-year Japanese government bond yield hit 0.23% earlier Thursday, the highest level since January 2016, when the bank introduced a negative interest-rate policy.

That reflects expectations for the Fed’s planned interest-rate increase in March and more to come later this year. Last week, the Bank of England raised its key interest rate for a second consecutive meeting to 0.5%.

For now, at least, Japan offers a mirror image of the U.S. economy. In the U.S., gross domestic product surged at a 6.9% annual pace in the fourth quarter and wages are rising. The flip side is high inflation that has worried many consumers.

In Japan, by contrast, while makers of a few widely consumed products such as cup noodle ramen have raised their prices, overall year–on-year inflation was just 0.8% in December. Growth was sluggish for most of 2021 and an Omicron surge this year has further damped the economy.

The 0.25% yield ceiling set by the Bank of Japan on Thursday was no surprise. The central bank had said in a March 2021 policy review that it wanted the 10-year government bond yield to fluctuate no more than a quarter percentage point above or below the zero target.

Mitsubishi UFJ Morgan Stanley Securities market economist Naomi Muguruma said that depending on reaction to U.S. price data released Thursday, the Bank of Japan might have to offer its unlimited-purchase guarantee for several consecutive sessions to keep yields under control.

Write to Megumi Fujikawa at [email protected]