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Bank of Japan Takes Another Step Away From Easy Money


The people who work the levers of Japan’s economy are in a bind: The country’s low interest rates, which they have long used to goose growth, are now well out of step with other big economies. Bridging that gap is tricky.

The yen is at a near-record low against the U.S. dollar, threatening to inflict prolonged inflation on Japan, which for years suffered the opposite problem. But if policymakers in Tokyo loosened their grip too much and rates rose too high, they could force higher borrowing costs on Japan’s businesses and consumers and cause havoc in financial markets.

On Tuesday, the central bank, the Bank of Japan, tried to thread the needle, announcing a policy that aims to nudge bond yields higher. The bank said it would use 1 percent as the starting point for yields on 10-year government bonds, instead of a cap, saying it expected inflation to go higher than it had previously believed. In July, it had announced it would allow those yields to slip above 0.5 percent, which had been the bank’s ceiling.

Decisions by the Bank of Japan, led by Governor Kazuo Ueda, reverberate around the world, especially in American markets. Interest rates in the United States are well above Japan’s — yields on 10-year U.S. Treasury notes briefly pushed above 5 percent in September, a level not seen since 2007.

Rates in the United States have jumped since the Federal Reserve, the American central bank, began a sustained effort to tame inflation sparked by an economic resurgence after the coronavirus pandemic. The Fed is expected on Wednesday to stand pat with rates already at a 22-year high.

With rates so high, Japanese investors — and many others — have bought up Treasuries to take advantage. Japan is the largest foreign holder of U.S. government debt, according to official federal data.

Interest rates on government bonds are used as benchmarks for many other kinds of debt 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. Purchasing bonds increases their value, or price, and lowers their yield, or payout. Selling them diminishes their value by putting more of them on the market; when their prices decline, their yields go up.

By piling into U.S. Treasuries, Japanese investors have increased demand for dollars and contributed to the decline of the yen. As a result, the Bank of Japan this year has been forced to prop up the yen while still trying to hold interest rates low.

By allowing its government bond yields to move higher, the Bank of Japan is returning some of the appeal of its domestic debt, hoping that will boost demand and strengthen the yen, at the expense of the dollar. The United States is the world’s largest economy, and Japan the third, and their currencies are among the most heavily traded.

Stefan Angrick, a senior economist at Moody’s Analytics in Tokyo, said the Bank of Japan has been “moving in the direction” of allowing yields to move higher for the past year. “The bank is clearly uncomfortable with the weak yen,” he added.

Last week, the yen fell to its weakest level against the dollar since October 2022, and then it rallied on Monday as whispers of a potential change to Bank of Japan policy emerged. The yen weakened initially after Tuesday’s announcement.

The central bank’s move comes at a pivotal moment in global markets. Geopolitical instability — wars in Europe and the Middle East and protectionist-minded trade policies by the world’s leading economies — has added to nervousness that a sudden run-up in U.S. government bond yields, which underpin borrowing costs for consumers and companies around the world, could threaten the resilience of the economy.

The Bank of Japan’s decision could amplify some of those fears in the United States, especially if it leads to a noticeable shift in demand for Treasuries among Japanese investors, which could push U.S. yields even higher.

Ben Dooley contributed reporting.



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