Photo/Illutration The Bank of Japan’s head office in Tokyo’s Chuo Ward (Asahi Shimbun file photo)

The Bank of Japan has decided to modify its monetary easing method, which was only to be expected, as the burden of the former policy on financial markets was becoming too great to ignore.

In fact, the decision was overdue. The central bank needs to act swiftly according to economic situations and price trends.

Long-term interest rates were added to the BOJ’s monetary policy control targets six years ago. Since last year, the rates were allowed to fluctuate 0.25 percentage points either side of the 0 percent target. The modification widens the fluctuation to 0.5 percentage points.

In explaining its reasons for the revision, the BOJ cited the deteriorated functioning of the government bond market that is central to its long-term interest rates control. If left unchanged, the BOJ said, distortions will arise to relative relationships among interest rates of bonds with different maturities and “could have a negative impact on financial conditions such as issuance conditions for corporate bonds.”

Since last year, the United States and European nations have raised their interest rates rapidly in reaction to the advancing global inflation. But amid this, the BOJ rigidly maintained its interest rates at low levels, which put great pressure on the foreign exchange market and caused sharp depreciation of the yen against the U.S. dollar.

At the same time, the BOJ’s government bond purchases ballooned to keep its long-term interest rates down, until the BOJ came to possess more than 50 percent of outstanding government bonds--an unprecedented situation.

The adverse effects of the rapid devaluation of the yen have been obvious since the first half of this year.

The Asahi Shimbun has repeatedly asserted in its editorials that the central bank must hasten to consider giving greater flexibility to its monetary policy, such as by expanding the range of fluctuation of long-term interest rates.

But the BOJ continued to adamantly deny any need for revision. In fact, the latest policy switch came out of the blue. 

The central bank should humbly admit its failure to act in a timely manner.

And its explanation of the policy revision isn't sufficient, either.

Expanding the range of fluctuation of the long-term interest rates under the current circumstances would naturally raise the rates. In fact, a hike of more than 0.4 percentage points was registered on Dec. 20.

But with regard to its long-term and short-term interest rates, the BOJ is still holding on to its forward guidance of maintaining the rates at the current or lower levels.

As a result, the rise in interest rate has not only taken the public and the markets by surprise, but it also conflicts with the BOJ’s own policy. Left alone, the situation will affect the trustworthiness of the bank’s “promises.”

The BOJ needs to rectify this, without delay. And it also must ensure flexibility in its future policy management. 

In October, the consumer price index was up 3.6 percent from a year earlier--a far bigger increase than the BOJ’s target of 2 percent.

The central bank projects that the nation’s import inflation will ease by the middle of the next fiscal year, lowering the overall inflation rate. But the outlook of the global economy is elusive and does not warrant unfounded optimism.

One after another, the central banks of the United States and European nations last week decided to slow the pace of their interest rate hikes. But the situation remains difficult to navigate. It remains to be seen if the United States and Europe can control inflation while averting an economic slowdown. 

We demand that the BOJ stay focused on the situation and take swift action even when confronted with unforeseen developments.

--The Asahi Shimbun, Dec. 21

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