The dismantling of unconventional monetary easing

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This marked a significant turning point in Japan’s financial policy. After careful preparation, the Bank of Japan (BOJ) formally decided to abandon measures such as negative interest rates and long-term interest rate targets that were part of unconventional easing. This decision signals a return to traditional monetary policy, effectively ending the era of unconventional easing policies initiated under the Abe administration.

The introduction of unconventional easing aimed to lift Japan’s economy out of deflation and stimulate growth. However, Governor Ueda, who had been in office for less than a year, deemed unconventional easing to have achieved its objectives and judged a shift in monetary policy as appropriate. This underscores the flexibility of monetary policy to respond to factors such as economic conditions and inflation.

The transition in monetary policy is expected to have various impacts on markets and the economy. Firstly, market reactions will be closely watched. The abandonment of unconventional easing could lead to uncertainties in stock prices and foreign exchange markets. Additionally, concerns arise regarding its impact on the economy. The effects of ending unconventional easing on economic growth and corporate investment plans are key considerations.

Furthermore, international interconnectedness is crucial. Changes in Japan’s monetary policy could influence other countries’ policies and international financial markets, potentially leading to capital flows and exchange rate fluctuations.

Moreover, both corporations and consumers will be affected. Changes in corporate funding and investment plans are expected, along with potential impacts on consumer borrowing and spending behavior. Considering these factors, a cautious approach is required in implementing the transition in monetary policy.

On the other hand, the continuation of purchasing long-term government bonds is deemed necessary. Purchasing long-term government bonds is essential to prevent a sharp rise in interest rates and maintain stability in financial markets. The BOJ’s commitment to stable purchases is expected to instill confidence in the market.

Specifically, the BOJ has announced its intention to continue purchasing around 6 trillion yen of bonds monthly. Additionally, measures such as increasing purchase amounts or implementing targeted operations in the event of a sharp rise in long-term interest rates have been outlined. These measures are expected to ensure stability in long-term interest rates and financial markets.

However, challenges accompany the reduction in the BOJ’s balance sheet and purchase amounts. To reduce purchase amounts, changes in fiscal policy are necessary. Although specific methods have yet to be determined, a cautious approach is needed while monitoring market dynamics.

Additionally, alongside the continued purchase of long-term government bonds, disposing of ETFs (exchange-traded funds) and REITs (real estate investment trusts) held by the BOJ presents a challenge. With the BOJ holding over 70 trillion yen worth of ETFs, selling them could significantly impact the market.

In conclusion, the transition in monetary policy resulting from the dismantling of unconventional easing has the potential to affect various aspects of the market and the economy. Therefore, careful policy management is required. The BOJ must continue to deploy appropriate monetary policies while considering market stability and economic growth.