More Government Bonds For The Bank Of Japan

More Government Bonds For The Bank Of Japan
Paul Allison, CFA

5 months ago2 mins

What’s going on here?

The Bank of Japan (BoJ) said on Monday that it’s gearing up for a round of government bond buying, essentially the reverse of inflation-fighting rate hikes.

What does this mean?

When a central bank buys its own country’s government bonds, it funnels more cash into the economy and directly brings down interest rates too. So usually, that’s a move reserved for times when an economy is floundering and needs a bit of a kick. It’s surprising, then, that the BoJ went on a shopping trip despite the economy holding firm. And if anything, the country could use higher interest rates, not lower ones, right now.

Why should I care?

For markets: A not-so-forbidden fruit.

The BoJ’s been clinging to its low interest rates, while many of the world’s central banks have got to hiking. That’s because Japan had to tempt prices higher after a long, economy-bruising period of deflation. But the country’s currency has felt the impact, with the yen slipping to an almost 30-year low against the dollar. And sure, that makes Japan’s export products cheaper and more attractive for foreign shoppers. But it also makes it more expensive to import the many commodities that Japan buys from elsewhere. That’s a recipe for het-up inflation, so higher interest rates are about to get a lot harder for the country to resist.

Japan inflation rate
*Estimate | Source: Statista

The bigger picture: The American nightmare.

Japan’s inflation is slightly lower than that of some other developed economies at just above 3%, but it’s not far off the US’s 3.7%. It’s interesting, then, that while the Federal Reserve is worried that high inflation may not budge, Japanese central bankers still believe it’s more of a blip. That may explain why Japan’s happy to push the button on inflation-inducing moves like buying bonds, while the US walks on eggshells to avoid pushing prices up any higher.

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