How Japan’s Central Bank Is Driving Speculation About the Future of Stimulus

When the Bank of Japan reduced its purchases of government bonds in January, some investors saw it as another sign that the bank was scaling back its massive monetary stimulus program. The BOJ disagrees with that interpretation, but in February the bond market pushed yields to near the upper limit of what the bank’s targeting. While the BOJ was able to drive them lower with an offer to buy an unlimited amount of bonds, not everyone is convinced that it can continue with its current stimulus when the Federal Reserve is raising rates and the European Central Bank is starting to talk about when to end its own bond purchases. The BOJ gave clearer direction in March when Governor Haruhiko Kuroda said the central bank will start thinking about how to exit its stimulus program around the fiscal year beginning April 2019.

To push inflation up to 2 percent. Kuroda believes almost two decades of deflation discouraged risk-taking activities among businesses and households, resulting in protracted economic stagnation. By buying hundreds of billions of dollars worth of bonds every year, the BOJ is keeping interest rates low, thereby stimulating economic activity, boosting investment in riskier assets and adding to demand in the hope of stoking inflationary pressures.