Today, at the June 14 meeting of the Bank of Japan's (BOJ) Monetary Policy Committee, the Bank of Japan decided to reduce the size of its JGB （Japanese Government's Bonds） purchases. The reduction will take place over the next one to two years, and the details of the plan will be decided at the next meeting in July. This represents a further policy step toward raising interest rates from the massive monetary easing measures that ended in March.
Many in the news are looking at whether or not this policy is effective as a countermeasure against the weak yen, but I would like to consider two points here: (1) Will the yen stop weakening, and (2) What impact will this have on the Japanese economy?
The first thing to keep in mind is that speculative money accounts for 90% of currency trading. One of the reasons for the yen's depreciation is said to be the interest rate differential between Japan and the U.S. While Japan has long had a zero-interest rate policy, the interest rate differential between Japan and the U.S. has opened up many times in the past, but the yen did not weaken on those occasions.
From this point of view, even though the BOJ's decision is in preparation for future interest rate hikes, it will not be enough to stop the yen from weakening. This is because speculative money is not necessarily driven by interest rate differentials.
Next, we will discuss the impact of a reduction in the scale of JGB purchases on the Japanese economy. The BOJ holds more than 50% of Japan's JGBs, and the BOJ's JGB purchases are synonymous with increasing the amount of money on the market. The BOJ's decision to reduce its JGB purchases means, in other words, that it has taken a further step toward tighter monetary policy.
However, the current price increases in Japan are due to cost-push inflation, not overheated demand. It is clear that tightening monetary policy at this point is a policy that will hurt people's lives and the domestic economy, where real wages continue to decline. Without growth in aggregate domestic demand, Japan's industries will not be able to revive, and the country will miss an opportunity to break out of deflation.
Thus, the reduction in JGB purchases announced at the policy meeting will have no effect in stemming the yen's depreciation and could prolong Japan's economic slump.
For more information on the impact on domestic companies, please see the following article.
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