Photo/Illutration Bank of Japan Governor Haruhiko Kuroda at a Dec. 20 news conference (Pool)

The Bank of Japan’s surprise interest rate adjustment on Dec. 20 may be a sign it is finally caving into intense government pressure after feeling it for months, according to political and market insiders.

And it clears the way for the bank to make wider changes next year, should it choose. 

While central banks of Western nations have raised their interest rates since March, the BOJ stuck with its ultra-loose monetary policy. The widening gap in rates was a major factor behind the weakening yen, which in turn caused domestic consumer prices to rise as imports became more expensive.

Prime Minister Fumio Kishida’s administration put together economic packages to deal with surging consumer prices, including huge outlays to restrain rising fuel costs.

But government and ruling coalition circles became disgruntled about the stubborn persistence of BOJ Governor Haruhiko Kuroda in maintaining its stance and began to prod the bank.

“There can be no denying that the BOJ felt pressure from the government,” said one ruling coalition lawmaker knowledgeable about monetary policy.

Others pointed out that Kuroda’s term as governor ends next April and raised the prospect that his decision to allow long-term interest rates greater flexibility to rise could have been influenced by that.

One government insider said the bank was about to run out of leeway to make a move.

“This was the (bank’s) last chance (to act) because if the decision was made after the new year, when interest intensifies on the next BOJ governor, any change in the direction of monetary policy would hold political significance,” the government source said.

Kuroda has been at the helm since he was handpicked by then Prime Minister Shinzo Abe in 2013 to implement the ultra-loose monetary policy that was one of the main pillars of Abenomics.

Noriatsu Tanji, an analyst with Mizuho Securities Co., said the latest decision clears the way for monetary policy to be revised after a new BOJ governor is chosen.

“This first step was one way of preparing the market for policy changes” next summer and beyond, Tanji said.

The sharp rise in the yen against the dollar and the sudden drop in prices on the Tokyo Stock Exchange following the BOJ announcement on Dec. 20 are signs that most market players never expected the bank to adjust its policy at all.

(This article was written by Akiyoshi Abe and Ryuhei Tsutsui.)

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