This has much looked like a movie award ceremony. And the winner is: The government of Japan. Last week there have been disputes on monetary policy in Japan between the Central Bank (BoJ) and the Government on different views about the future of economic developments and the appropriate interest rate policy. Finally the arguments (or influence) of the government of Japan have succeeded and any interest rates decision has been postponed.
The Bank of Japan released Thursday its decision that its nine-member policy board voted 6 to 3 to keep on hold the target for the overnight call rate at around 0.25%. The Japanese government has put pressure on the BoJ to keep rates unchanged as consumption and prices remain soft. Delaying their hike decision due to the government influence will probably put into question the independence of the Bank and its ability to communicate to the markets a policy stance. The reputation of the Bank has probably been affected and future Central Bank pre-emptive statements might be meaningless to the markets.
The BoJ’s decision to keep rates unchanged has world wide policy implications. Japan is one of the biggest buyers of American assets (bonds) given the current level of yields of Japanese bonds. Early December, some bond market correction worldwide was related to the unwinding of ‘carry trades’ that uses the yen as a funding currency. Delaying interest rate movements might mean higher rates in the future, and the turmoil induced by carry trades would have to wait.