Bank of Japan And Key Rate:

Article source: https://mainichi.jp/english/articles/20220617/p2g/00m/0bu/022000c

Article:

TOKYO (Kyodo) -- The Bank of Japan on Friday maintained its ultraeasy monetary policy in defiance of growing market pressure to tweak it, unfazed by the prospect of further yen weakness as it lags far behind major peers forging ahead with rate hikes to fight inflation.

In a widely expected move, the central bank decided at a two-day policy meeting to set short-term interest rates at minus 0.1 percent and guide 10-year Japanese government bond yields around zero percent. The yen plunged well below 134 against the U.S. dollar immediately after the decision, though the Japanese currency rebounded quickly and trading became volatile.

Ideas:

The Bank of Japan, whether good or not so good, as decided to continue with it easy money policy compared to other advanced economy central banks.

There might be some good reasons for what the BOJ is doing. It might be thinking that the Japanese economy is just too fragile at this time to increase rates and that rate increases might actually be a negative for many in the economy.

While a 0.1 perdent rate might be good for short-term borrowers such as businesses that need loans because of the increase in material costs or the increase in energy costs, it might not be good for ther overall health of the banking industry unless of course the BOJ has some kind of protections or susidies to protect them from losses.

Volatility, which is the rapid increase or decrease of something is very hard to manage from a company perspective. Companies need stability not something that is up and down constantly. Companies are unable to prepare correctly to the quick changes in prices, currency exhange rates and so on unless they have the resources to use future buying markets and other financial tools, which many small and medium sized companies don't have.

Article:

The BOJ seems to be in a bind. It needs to justify its need to retain its ultralow rate policy based on the view that a recent bout of inflation will not be sustainable while the yen's rapid depreciation, a byproduct of its dovish stance, raises import costs for resource-scarce Japan.

Leading up to the decision, the BOJ's resolve to cap a rise in the benchmark 10-year yield above 0.25 percent had been increasingly tested by investors expecting the central bank to tweak its monetary policy.

It reaffirmed its commitment to unlimited purchases of 10-year bonds at a fixed rate of 0.25 percent every business day in principle.

Ideas:

The BOJ knows it can't please everyone and whatever it does is not going to keep everyone happy. So it has to balance out the best it can the positives and negatives on what it thinks is best for the Japanese economy.

If the BOJ does increase rates or increase them too much or too fast it could cause some real problems with borrows because of increasing material and energy costs.

Well you might say a rate increase might make the yen a little stronger which might be but how long will it take for energy and material prices to get back to some kind of normalcy and what kind of damage will the economy and companies go through in the process.

So there is a lot of unceertainty at this point on what and how should be BOJ do or do anything different.

Article:

The BOJ stuck to its view that the economy has "picked up as a trend, although some weakness has been seen in part, mainly due to the impact of COVID-19 and a rise in commodity prices."

With the yen on a falling trend, the central bank said, "It is necessary to pay due attention to developments in financial and foreign exchange markets and their impact on Japan's economic activity and prices."

Major central banks are scrambling to tame soaring inflation. The U.S. Federal Reserve went ahead with a 0.75 percentage point rate hike on Wednesday, the largest since 1994, and the central banks in Britain and Switzerland also followed suit by raising rates. The European Central Bank is planning to hike rates in July.

Ideas:

I think what is missing is that the current inflation situation globally is not demand or consumer inflation but supplier inflation and not even supplier inflation but something much different. 

Most likely not even suppliers why understand prices keep increasing and or they can't control prices too.

So the idea that as rates increase there is going to be less supplier activity which then might lower prices and inflation might not be the best approach and even suppliers might not be able to control prices in this current scenario.

So maybe the BOJ sees this and undersands this is not consumer demand or maybe not even the normal inflation that was seen before the pandemic.

This might be a kind of inflation that in reality just hasn't happened in a very long time and the normal strategies of central banks might not work in this scenario.

But again most of the blog writings here are just the brain storming of ideas.

Article:

The yen has met intense selling pressure as financial markets expect the gap in interest rates between Japan and its overseas peers to widen.

The rapid fall of the yen, which recently plunged below 135 to the U.S. dollar, prompted Governor Haruhiko Kuroda to highlight its negative impact on the economy whose recovery from the COVID-19 pandemic remains fragile.

The BOJ chief is scheduled to hold a press conference later in the day to explain the policy decision.

Ideas:

The yen probably will continue to see a lot of pressure in selling markets because of the difference between the yen, the Euro, and US dollar.

Kuroda know that the weak yen might not be good for all in the Japanese economy but most likely at this time, has decided to just stay the course and they probably knows the BOJ has to balance out as much as possible the positives and negatives of the weak yen.

He probably knows the increased raw material and energy costs are being compounded becasue of the weak yen feels to change course now might cause more harm to the economy.

For example a small company might need a loan because of the increased energy and material costs, and needs the loan to stay in business.

So at -0.1 percent the small company might feel good about the loan but if the BOJ increases the short rate it might not be good or a company and now they have compounded material and energy costs increases and now they have to pay even more for the loan at a positive rate meaning even more challenges for the company or any company especially small and medium size that don't have the resources to overcome the current inflaton and weak yen challenges.

Have a nice day and be safe!