On March 19, the Bank of Japan (BOJ) decided to end its negative interest rate policy and raised the policy rates from -0.1% to 0.1%. At the same time, the BOJ announced the abolishment of the yield curve control (YCC) and the discontinuation of purchases of risky assets such as exchange-traded funds (ETFs). The “extraordinary monetary easing,” which started in 2013 under the leadership of Haruhiko Kuroda, the former Governor of the BOJ, with the goal of “2% price increase in 2 years,” ended without achieving its initial goal. Although some aftereffects still remain, such as the Japanese government bonds (JGBs) owned by the BOJ accounting for 50% of the total outstanding amount, and the handling of bloated ETFs, the Japanese economy will restart in a normal financial environment with interest rates.

For Kazuo Ueda, the current Governor of the BOJ, who took over the reins from Kuroda in April 2023, the biggest challenge was to end the “extraordinary monetary easing.” While long-term interest rate hikes created a trend toward a policy shift, the BOJ continued to deliver the message to the market that it would “maintain the environment of monetary easing” all the time. This increase in the interest rates “for the first time in 17 years” was not only accepted by the economic and political worlds but was also calmly accepted by market participants as “something within expectations.” The exchange rates showing depreciation of the Japanese yen despite the rate hikes is evidence of the policy decision with no surprises.

At the press conference, Ueda once again indicated the continuity of the policy, saying, “We will continue to purchase a certain amount of JGBs to prevent a surge in interest rates.” and that “The role of the large-scale monetary easing has come to an end. Short-term interest rates will be the principal policy measure from now on.”, declaring the end of the conventional policy. Since Ueda’s stance is to seek a monetary policy while communicating with the market, the impact on household expenses and business activities, including home mortgages, is expected to be minimized for the time being. However, a return to the world existing with interest rates will be a major turning point for the Japanese society that has been having an easy time with low interest rates and economic stagnation.

The “extraordinary monetary easing” temporarily uplifted the economy, helped in part by the strong impact of the catchphrase that shows the feature of monetary easing and excessive expectation on the effects of the policy at the time. Reviews of the advantages and disadvantages of the measure are essential. It is at least certain that the “world without interest rates” has loosened fiscal discipline and delayed “metabolism” in companies and businesses. During the time when this monetary easing measure had been in place, while many companies that could not take the first step toward structural reform prolonged the lifespan of their business, the money that should have been supplied plentifully did not go to investments, and the retained earnings of not a few companies expanded. The rising cost of living that triggered the wage increase was also a result of external pressure of the “weak yen.” Now we are standing on a new starting line. It is an urgent matter for us to break away from the old structure that continuously relies on stagnation based on the natural principle of taking risks and recouping investments.

This Week’s Focus, March 22

Takashi Mizukoshi, the President