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Can The Bank of Japan Continue to Maintain Yield Curve Control with Rising Inflation?

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This case presents a comprehensive overview of the BOJ’s ultra-easy monetary policy which started in 2012.

After years of sustained government and central bank intervention, Japan’s monetary policy has reached a critical stage. Then world questioned how the BOJ’s new Governor, Kazuo Ueda can find a way to extricate the nation from years of economic inertia, stimulate domestic consumption, boost GDP growth, and stabilize inflation at a 2% threshold. And world questioned this could be achieved without damaging the global economy.

On March 19, 2024, with prices seemingly on track toward the bank's goal of sustained 2% inflation, Japan's persistently weak yen and robust wage hikes offered by Japanese companies, the BOJ ended the negative rate policy (NIR) and raised interest rates for the first time in the past 17 years. The BOJ also ended its yield curve control policy (YCC) of keeping 10-year Japanese government bond yields at around 0%. It has fulfilled their roles but will continue the large-scale monetary easing (QE).

The BOJ's policies have stood in contrast to other central banks, which have raised rates sharply over the past two years to combat inflation sparked by the COVID pandemic, the Ukraine war and supply chain issues

Learning Objective:

The teaching objectives of the case are:

  1. To help students understand factors that impact monetary policy. Monetary authorities traditionally focus on elements they control, primarily short-term interest rates, which they use to either stimulate or dampen economic activity.
  2. To give students the opportunity to explore the impact of an inflation target and its effect on a central bank’s monetary policy. Although a 2% inflation goal is a global standard, the BOJ didn’t move toward a normalization of monetary policy, even after consumer prices rose by more than 4% in 2023.
  3. To help students understand the three definitions of inflation rates, and which one they should use as an inflation indicator.
  4. To encourage students to explore conditions under which Ueda could change monetary policy by modifying YCC or NIR policies.
  5. To provide students with an opportunity to study how financial turmoil in the US or European banking sectors affects Japan’s domestic economy and monetary policy.
  6. To help students to explore the relationship between the BOJ’s interest rate changes and its impact on other economies.
  7. To give students an understanding of the risk to Japan of maintaining an elevated debt-to-gross domestic product (GDP) ratio, and how a massive government debt burden impacts central bank policy. In 2022, Japan’s GDP was JPY540tn (USD4tn), and the national debt reached 200% of GDP.
  8. To encourage students to understand the relationship between currency markets and investment. Wide interest rate differentials between Japan and the US weaken the JPY and increase the affordability of Japanese real estate for international investors.

Year of Publication: 2024
Ref. No.: 24/787C
Discipline: Economics & Business Policy
Industry: Banks & Diversified Financials
Country: Japan
Company: The Bank of Japan
Languages: English
Pages of Text: 11