Those in charge of Japan’s economy are in a dilemma: The country’s low interest rates, which they have long used to fuel growth, no longer match those of other major economies. It is difficult to bridge that gap.
The yen is at near-record lows against the U.S. dollar, threatening a prolonged run-up to inflation in Japan, which has faced the opposite problem for years. But if policymakers in Tokyo loosen their grip too much and rates rise too high, they could impose higher borrowing costs on Japan’s businesses and consumers and wreak havoc in financial markets.
On Tuesday, the Bank of Japan, the central bank, tried to thread the needle by announcing a policy aimed at pushing bond yields higher. the bank said It will use 1 percent as a starting point for yields on 10-year government bonds, rather than a ceiling, saying inflation is expected to be higher than before. In July, it announced it would allow those yields to slip above 0.5 percent, the bank’s limit.
The decisions of the Bank of Japan, under the leadership of Governor Kazuo Ueda, echoed around the world, especially in the US markets. Interest rates in the United States remain well above those in Japan – yields on 10-year US Treasury notes briefly exceeded 5 percent in September, a level not seen since 2007.
Rates in the United States have jumped since the Federal Reserve, the US central bank, began a sustained effort to control inflation resulting from the economic revival following the coronavirus pandemic. The Fed is expected to keep rates on hold on Wednesday, with rates already at a 22-year high.
With rates so high, Japanese investors – and many others – have bought Treasuries to take advantage. According to official data, Japan is now the largest foreign holder of US government debt.
The interest rates on government bonds are used as a benchmark for many other types of loans, including mortgages, credit cards, and business loans. The cost of borrowing helps determine the growth of an economy.
Central banks are the gatekeepers. They move interest rates up and down primarily by selling and buying government bonds. Buying bonds increases their value, or price, and decreases their yield, or payout. Selling them reduces their value by putting more of them on the market; When their prices fall, their yields increase.
By depositing money in US Treasuries, Japanese investors have increased demand for dollars and contributed to the decline of the yen. As a result, the Bank of Japan has been forced to support the yen this year while trying to keep interest rates low.
By allowing its government bond yields to rise higher, the Bank of Japan is clawing back some of the appeal of its domestic debt, hoping this will boost demand and strengthen the yen against the dollar. The United States is the world’s largest economy, and Japan the third, and their currencies are among the most traded.
Last week, the yen fell to its weakest against the dollar since October 2022, and then rallied on Monday as whispers of a possible change in Bank of Japan policy rose. The yen initially weakened after Tuesday’s announcement.
The central bank’s move comes at a critical moment in global markets. Geopolitical instability – including wars in Europe and the Middle East and protectionist-minded trade policies by the world’s leading economies – has added to the jitters fueled by a sudden rise in US government bond yields, which raises borrowing costs for consumers and companies around the world. Reduces. The flexibility of the economy may be at risk.
The Bank of Japan’s decision could raise some fears in the United States, especially if it leads to a significant shift in demand for Treasuries among Japanese investors, which could push U.S. yields even higher.
ben dooley Contributed to the reporting.