BOJ Launches Yield Curve Control and Direct Stimulus Package to Manage Depreciation of the Japanese Yen
For the past year, Japan has been dealing with global inflation, declining interest rates, low GDP, and depreciation of the Japanese Yen as an aftermath of the Russia-Ukraine war. Due to Japan’s lower GDP, interest rate, a weak yen, and rising inflation, Japan’s consumer confidence has been at the lowest since the pandemic, i.e., 2.99 %. For the first time in 24 years, the Japanese yen’s price went to a 32-year low; on 20th October, the Yen dropped below 150 to the US dollar.
On 15th November, Japan’s cabinet office declared Japan’s Gross Domestic Product with a 1.2 % annualized decline, mainly because of inflation, depreciation of the Japanese Yen, and rising costs of imports.
“The demerit of a weak yen is that it pushes up the import cost of energy and food, thereby increasing household burdens,” said Kanda Masato of the Ministry of Finance.
The high fuel prices due to the Russia-Ukraine war have dramatically dropped Japan’s interest rates. As a result, the Kashida government had to intervene in the foreign markets to buy the Yen. As per the Japanese Ministry of Finance, from 29th September to 27th October, Japan spent 6.34 trillion Yen to support the Japanese Yen in US dollars.
Suzuki Kazuto Warned About the Destructive Consequences of the Depreciation of the Japanese Yen
He concluded that foreign entities could buy Japanese companies or even Japanese land. The depreciation of the Japanese Yen has adversely affected the salaries and living standards of Japanese diplomats in foreign lands, as a decline in the domestic wages of a country also stimulates the salaries of its diplomats. The World Bank chief warned about the “perfect storm” of global stagflation, which could reverse the years of global economic growth.
Apart from macroeconomic instability, the issue of regional security has raised many questions. China’s intervention in the South China Sea has been heavily criticized by Japan, thus triggering a risk of war between the two nations. As a result, the Japanese Commission of Experts has advised Fumio Kishida to increase defense expenditures. The Liberal Democratic Party has already agreed to spend on military expenditure, which makes it almost 1% of Japan’s gross domestic product over the next five years. The Japanese nation will bear the cost of that expenditure as a tax burden.
Government Initiatives to Keep Japan Developing And Flourish
To meet the rising household costs of living, electricity, and gasoline, the Japanese government has approved public spending of 29.1 trillion Yen. However, these public funds have a heavy price of exceeding the government’s debt to 250 % of GDP.
On the other hand, The Bank Of Japan aims to launch a new approach called yield-curve control, which targets a -0.1 % interest rate for the short term and a 0% interest rate for ten-year bond yields. For this, it plans to buy an infinite amount of bonds to defy an indirect 0.25 % cap for the ten-year yield. It would be better if the BOJ used a neutral interest rate as a neutral interest rate neither changes nor restricts economic growth. The governments cannot change the currency’s depreciation or inflation; they can offset the negative impacts by increasing fiscal spending.
Despite the unexpected financial setback, Mr. Kobayashi of Mitsubishi UFJ is hopeful for Japan. “it’s already certain that we will return to positive growth,” he said.
What do you think of the above measures to improve the country’s economy? Share your thoughts in the comments below!
