Global: Bank of Japan Affirms Commitment to Easy-Policy Exit Despite Financial Considerations

Bank of Japan Governor, Kazuo Ueda, has stated that financial concerns will not hinder the central bank’s ability to phase out its extensive monetary stimulus program when the appropriate time arises.

Although Ueda acknowledged that there is still a considerable distance to cover before the Bank of Japan can exit its ultra-loose monetary policy, his comments come amidst market speculation regarding the potential dismantling of his predecessor Haruhiko Kuroda’s radical stimulus program.

During an academic seminar on Saturday, Ueda explained that when the central bank increases interest rates, it will face a squeeze on its profits due to higher interest rate payments to financial institutions for reserves held at the bank. However, he also noted that the bank is expected to earn greater interest income as its current government bond holdings are gradually replaced by higher-yielding bonds. Ueda emphasized that predicting the extent to which a future exit might impact the Bank of Japan’s finances is challenging.

Ueda asserted, “The objective of the Bank’s monetary policy is achieving price stability, which is its mission as stipulated by law. Considerations of the Bank’s finances, etc., do not prevent it from implementing necessary policies.” He stressed that as long as the central bank conducts appropriate monetary policy, its ability to carry out monetary policy remains unaffected, even if it experiences a temporary decrease in profits and capital.

Under the yield curve control (YCC) policy, the Bank of Japan guides short-term interest rates to approximately -0.1% and limits the 10-year government bond yield at around 0%. This policy aims to stimulate economic growth and maintain inflation sustainably around the 2% target. The bank also maintains a significant asset-buying program initiated in 2013.

While some experts have expressed concerns about the Bank of Japan’s extensive balance sheet potentially complicating an exit from ultra-loose monetary policy and exposing the bank to significant losses, Ueda maintains that the bank will continue ultra-loose monetary policy until inflation, which has exceeded 2% for over a year, transitions from cost-driven inflation to price increases driven by robust domestic demand and higher wages. However, he also affirmed that the Bank of Japan will contemplate an exit when it is confident in the sustained, stable achievement of its price target.