Japan relies on ultra-flexible monetary policy – WORLD

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J apan can still be very traditional. But it's one of the world's most innovative nations. Now the country is playing a pioneering role in monetary policy. Central bankers are planning one of the greatest monetary policy experiments in economic history. It is essentially nothing less than extinguishing the gravitational economic forces. The Bank of Japan (BoJ) wants to bring the highly indebted and declining country into a sustainable growth path through the central bank press. At the same time, the stagnant inflation rate should be reduced to two percent. The experience is the subject of a thorough review by politicians, central bankers and investors. Because if that succeeds, there should be many imitators. Many states suffer from high debt and an aging society.

It was one of the most anticipated and expected decisions in the financial world. In September 2016, Japanese central bankers entered a new era. Since then, not only the key interest rates have been determined by the custodians of the currency, but also by the massive purchases of bonds, the interest rates of the state bonds to ten years. For many experts, the question was raised as to whether the BoJ would remain firm on its path or whether it would follow other central banks and withdraw from ultra-soft monetary policy. As much as the Japanese head of state Shinzo Abe oscillates because of numerous scandals. Abe is next to the head of the central bank, Haruhiko Kuroda, one of the architects of the Japanese central bank's experience, which also operates under the name of Abenomics. After Tuesday's decision, all parties have clarity. The Bank of Japan said on Tuesday that it was not thinking of getting out of ultra-soft monetary policy. It remains the only major central bank that continues to inject billions of dollars indefinitely into the markets and to keep its negative interest rates indefinitely.

"The Bank of Japan has made it clear that interest rates will remain as low as they are today," said Yuri Goto, Nomura's strategist. It does not just mean the short-term deposit rate, which is still at 0.1%. The interest rate target for 10-year government bonds is also unchanged from zero to 0.1%. The latter is part of the great experience. After all, Japan is heavily indebted, the debt ratio is 230%. No other country in the western world, not even Greece, has accumulated so much debt. In order not to enter a spiral of dangerous debt, the country can not afford higher interest rates. Thus, the central bank buys government bonds repeatedly to keep charges low. Just last week, the monetary authorities had to intervene several times to avoid exceeding the yields over ten years. The investment bank Goldman Sachs had calculated that the interest without the BoJ's interventions should rather be 0.4 to 0.5%.

But that will not happen. The Japanese monetary authorities have even substantiated their promise with another instrument. Kuroda has for the first time given a long-term perspective, known in the jargon as "forward guidance". And there, actors can read in black and white that interest rates stay so low for a long time

"The newly introduced forecast puts an end to any speculation that the BoJ could abandon its target rate of interest." short-term interest, "Hiroshi Shiraishi says. at BNP Paribas. Market reactions have not been slow in coming. Japanese 10-year government bond yields fell well below the 0.1% mark. The Japanese yen is strongly depreciated against the dollar.

Because in the coming months, the Bank of Japan will inject more yen into the market, and according to the law of supply and demand, the Japanese currency will lose value. 19659009] A measure of intervention is the balance sheet of the Japanese central bank. It is becoming increasingly threatening and has now reached almost 100 percent of Japan's economic output. Even the European Central Bank (ECB), which is extremely active with its bond purchases, or the US Fed can not keep up. The ECB's total assets have swelled to 41% of economic output In the United States, the Fed's monetary policy equates only to 21% of the US economy. Only the Swiss National Bank (SNB) is even more active. The total assets of the Swiss Confederation represent 120% of the Swiss economic output

and the Swiss have something in common with Japan. In the meantime, they buy not only bonds but also shares. Since 2011, the Japanese central bank has bought index funds worth $ 185 billion. In doing so, it moves the bulk of the index fund market with its purchases. The purpose of these purchases is, in particular, to bring inflation to the desired goal of 2% thanks to the high level of liquidity. But inflation continues to lag behind the target in Japan. And Kuroda has reduced expectations. By 2021, it is only expecting inflation to reach 1.6%. Many experts therefore expect that ultra-flexible monetary policy will take many years.

That the BoJ buys more and more bonds or securities, both risks and opportunities. After all, many critics argue that this could be a brave way of slowing down debt relief while offering a good feeling through high stock prices, which in turn boosts growth and economic growth. And it is probably also the economic experience. But many experts are wondering how long the central bank can continue the buying program without losing its credibility. The question is at which level the central bank can buy debt and shares. And the progress of the experience will be monitored by other currency watchers, politicians and investors.