Bank of Japan (BoJ) - Notes on Reserve Bank of India

1. Institutional framework of [Japan](https://www.bis.org/mc/currency_areas/jp.htm) by **BIS** ## March 2024 It raised the short-term interest rate target from -0.1% to 0-0.1%, thus ending the 8-year long period of negative interest rates. 1. In March 2024, the Bank decided to change the monetary policy framework and set the [uncollateralised overnight call rate](https://www.boj.or.jp/en/about/education/oshiete/seisaku/b32.htm) , locally known as *Mutan*, as the policy interest rate. Since then, the guideline for market operations has specified the target for the rate. 1. ==How have the [BoJ's guidelines](https://www.boj.or.jp/en/about/education/oshiete/seisaku/b42.htm) for market operations changed?== 2. So they do not announce a single rate. BoJ currently sets an explicit target for the overnight interbank rate, commonly called the target rate. The aim is to use the short-term interbank rates are one of the channels through which monetary policy decisions are transmitted to the economy. 3. So in Japan (and the US, with the Federal Reserve), the main steering wheel is an uncollateralised overnight call rate, not a direct lending rate. It is the specific interest rate that commercial banks charge to borrow from each other on an overnight basis, and is called the [federal funds rate](https://www.federalreserve.gov/economy-at-a-glance-policy-rate.htm) in US. 4. As the central bank sets the goal (target rate) and the actual market rate fluctuates slightly throughout the day based on supply and demand, the BOJ actively steps into the open market (buying or selling government bonds) to increase or decrease the supply of money. 5. If a Japanese bank money from other commercial banks at the interbank rate (target rate), they can go directly to the BOJ which lends under the central bank standing facility called the Complementary Lending Facility at the Basic Loan Rate. So [what is the Complementary Deposit Facility?](https://www.boj.or.jp/en/about/education/oshiete/seisaku/b37.htm) 6. Together these two rates form what central banking calls a corridor system around the target 7. It was the first rate increase in 17 years. ## July 2024 1. Japan's Nikkei 225 plunged 12.4% on August 5, 2024 - The BOJ's rate hike on July 31, followed by weak US jobs data on Aug 2 and fall is US equities, triggered a violent unwind of the heavily leveraged yen carry trade, driven by fears of a US slowdown and a rapidly strengthening yen that hit the projected profit margins of Japan's major exporters. 2. It was the steepest single-day drop since 1987. 3. The two events pushed yen from 161 to 141 to a dollar in just 3 weeks. 4. To summarise, a sufficiently sharp fall in US stocks leads to yen appreciation, which shows that the yen carries safe-haven appeal. ==However, the quantum of fall required to trigger demand for the yen increases if expectations of the rate differential remaining wide are strong.== 5. So a weaker yen keeps fueling (funding) demand for US stocks and bonds (via the carry trade), and hence an appreciation in the yen triggered by BOJ rate hikes would also reverse that flow into US assets. Hence, it is not yen weakness but a quick and sharp reversal of that weakness (a recovery in yen), that is, yen appreciation that could trigger a crisis. A slow, gradual unwind of the carry trade is unlikely to trigger a sudden, disorderly fall in stocks and markets. ## May 2026 1. USDJPY continues to rise - In month of April and May 2026, BoJ sold roughly $75 billion after JPY fell beyond 160. BoJ was also spotted buying Yen for the first time since July 2024. 2. So Japan spent (sold) trillions of dollars from its FX reserves buying yen to defend its currency this year but to no avail. 1. The Ministry of Finance decides on foreign exchange market interventions, while the Bank of Japan (BOJ) executes the actual selling or buying as its [agent](https://www.boj.or.jp/en/intl_finance/outline/expkainyu.htm). 3. The yen has continued to slide despite these interventions, which suggests that the wide US-Japan rate differential, that is low Japanese interest rates versus other major economies like the US, is a key driver of the currency's depreciation. In other words, the cost of holding yen is high and the reward for converting it into dollars is high. ==So a value of a currency of a country is as also an effect of the monetary policy of other economies, especially advanced ones==. But it is not the only reason. Trade balances (food and fuel being major drivers of trade outflows), and speculative positioning also play a role. Higher fuel prices weakens yen further, imported-inflation rises, real interest rates become further negative increasing cost of holding yen leading to more capital outflows, that is carry trade, and weakening yen further. So it is like a loop. 4. At the same time, BoJ cannot raise rates to attract $ flows. The Bank of Japan has strong reasons to move cautiously on rates. Japan carries massive government debt, roughly over 250% of GDP, so rapid hikes would sharply raise debt servicing costs. Much of this debt is domestically held, and the BOJ itself owns roughly half of outstanding government bonds. This, of course, limits the risk of a foreign-creditor-driven debt crisis but it also means aggressive hikes could trigger disorderly moves in the JGB market and lead to mark-to-market losses (MTM) on the BOJ's own balance sheet, with same effects for regional banks that hold large JGB portfolios. Any appreciation in yen, say due to rate hikes, will also reverse the growth in over-crowded US stocks (especially tech) and bonds. 5. Can rise in Inflation lead to rates rising fast enough? The BOJ is also waiting to see wage growth sustainably above target before tightening further, rather than reacting to headline inflation alone, and is mindful that many Japanese mortgages are floating-rate, so higher rates would squeeze households directly. Hence, the risk is not merely falling yen but the impending, if they happen, rise in JPY rates. As a result, even if inflation rises, the BOJ is likely to keep hikes gradual rather than aggressive. ==In other words, markets assume the BOJ will stay behind the inflation curve, as they believe the BOJ won't raise rates high enough or fast enough to make holding Yen attractive.== 6. With US rates staying elevated and BOJ tightening proceeding slowly, the yen is likely to keep offering negative real interest rates, encouraging carry trade and further capital outflows. 7. Trade deficits, US-Japan rate gap, expectation of slower rate hikes by Japan (due to large budget deficits), lower JPY rates due to large debt buying by BoJ, continues to put pressure on yen. ## June 2026 1. June 16, 2026 - The Bank of Japan raised its target for the uncollateralised overnight call rate **to 1.0% from 0.75%.** 1. June 22, 2026 - Nikkei 225 hit new high again 72,353.96. It touched the 6th new high. Since the burst in 1989, the index had not made new highs. Rising prices (leading to earnings growth), pro-market govt. policies of Japan's new prime minister, Sanae Takaichi, and US spending on AI are some of the reasons. Also, unlike South Korean market, where major share of AI tech is with 2 companies-Samsung Electronics and SK Hynix, Nikkei Index has diverse players across different parts of the artificial intelligence and semiconductor supply chain. 2. The Nikkei 225's post-1989 low was 7,054.98 yen, hit on March 10, 2009, down roughly 82% from its 1989 peak. ## July 2026 1. Yen fell to 40 year low of 163 to a US dollar on July 22, 2026. 2. [July 22, 2026](https://www.customs.go.jp/toukei/latest/index_e.htm) - June-2026 trade deficit had widened to $2.49bn due to rise in price of gas/coal, food, and a shift away from cheaper Middle Eastern crude through Strait of Hormuz (price rose, but shipments fell 13.7% y-o-y, and value-wise oil imports rose by 60%) toward pricier alternative suppliers amid the Iran conflict, along with strong domestic demand, boosted by the government's late-2025 stimulus measures. Weaker yen also inflated the yen-cost of dollar-priced energy imports. 1. Exports rose 19.3% y-o-y, supported by weaker yen and demand for AI-related data centres. Also EV exports to US rose 13% y-o-y as high gasoline prices tilted demand towards such vehicles. 3. July 27, 2026 - USDJPY is trading at 163. Now, the official U.S. employment report and unemployment rate for July 2026 will be published by the [Bureau of Labor Statistics](https://www.bls.gov/schedule/news_release/empsit.htm) on Friday, Aug 7, 2026, at 8:30 a.m. ET (IST - 6 pm, difference is 9.5 hrs in DST (summer) and 10.5 when DST is off (winter). If the numbers are strong, that would keep the Fed hawkish and make the yen weaker. But poor jobs data, combined with any BOJ decision to raise its rate target or signal a path of future hikes, may lead to sharp gains in the yen and a fall in Japanese stocks. ## August 2026 1. The Federal Reserve Bank of New York ==sold euros to purchase Japanese yen== on behalf of the U.S. Treasury. US may not want Japan to sell its holdings of US treasuries to buy yen, and push US treasury yields higher. Also, US did not sell US dollars, which tells us that there is no preference for weaker dollar by US govt. 1. [2011](Feds_201103_Treasury%20And%20Federal%20Reserve%20Foreign%20Exchange%20Operations.pdf) - The U.S. had intervened to [sell the yen in 2011](https://www.newyorkfed.org/medialibrary/media/newsevents/news/markets/2011/fxq111.pdf), coordinating with G7 members after yen's sharp appreciation following Japan’s earthquake and tsunami disaster. 2. In 1998 - It had purchased yen. ### Yen Intervention 1. It seems unless yields move higher, which will be difficult for Japan given the size of the outstanding debt. A big portion of this debt has to be rolled over year. So rising yields quickly affect existing debt as it matures and gets reissued at higher rates. Rising debt-servicing costs would rapidly consume a big part of the national budget, forcing the government to borrow more just to pay interest and risking a compounding fiscal crisis. 2. Intervention helps to arrest a fall in a currency if there is speculation, divergence from strong fundamentals, and if it is accompanied by rise in interest rates. 3. Lower JGB yields due to buying by BoJ has kept yen stronger even at current levels of 160 to a dollar. It may sound strange to call yen overvalued when USDJPY is above 160. At current lower yields, yen should be further weaker to compensate for debt risk. ## Further Reading 1. March 2024. *Japan ends era of negative interest rates. A chief economist explains*. World Economic Forum. [Link](https://www.weforum.org/stories/2024/03/japan-ends-negative-interest-rates-economy-monetary-policy/) 2. April 21, 2026. *BoJ warns corporate defaults will rise if Gulf conflict continue*. The Banker. [Link](https://www.thebanker.com/content/a32c0783-4750-408a-8017-f60a1c75b9b2) 3. Dec, 2001. *The main features of the monetary policy frameworks of the Bank of Japan, the Federal Reserve and the Eurosystem*. Authors-Denis Blenck, Harri Hasko, Spence Hilton and Kazuhiro Masaki. BIS Papers 9. [Link](https://www.bis.org/publ/bppdf/bispap09b.pdf) 4. Bank of Japan. (2023). _Outline of the Bank of Japan's foreign exchange intervention operations_. [Link](https://www.boj.or.jp/en/intl_finance/outline/expkainyu.htm)