Bank of Japan to cut economic support in pandemic era

The Bank of Japan has announced plans to cut its emergency coronavirus economic support program, cutting its corporate debt purchases to pre-pandemic levels, while tracking other major global central banks in l gradual elimination of crisis policies.

The BoJ has not made any changes to its ultra-flexible monetary policy, however, as it monitors the impact of the new variant of the Omicron coronavirus.

Monetary support, which was introduced in March 2020, included the purchase of corporate bonds and commercial paper as well as providing cheap finance to financial institutions that provided loans to small businesses affected by the pandemic.

The central bank said on Friday it would close its purchases of corporate bonds and commercial paper, which increased its holdings by 20 billion yen ($ 176 billion), by the deadline of March 2022, as planned. The central bank has said it will extend the small business loan program for six months until September.

This decision is in line with that of other central banks, which decided this week to tighten their monetary policy. The Bank of England on Thursday raised its benchmark interest rate in response to soaring inflation, making the UK the first G7 economy to do so since the start of the pandemic.

The Federal Reserve also announced the planned end of its pandemic support to the US economy, doubling the rate at which it would cut its government bond purchases.

After a two-day monetary policy meeting this week, the BoJ decided to keep its monetary levers in place, guiding overnight interest rates to minus 0.1% and those for 10-year yields to around 0. %, as expected.

Friday’s policy move left the BoJ among the most accommodating central banks in the world, a position that Marcel Thieliant, senior Japanese economist at Capital Economics said, would remain in place for the foreseeable future.

Expectations in this regard have played heavily on the yen, keeping the Japanese currency below 110 yen to the US dollar since the end of September.

The exchange rate barely moved following the BoJ’s announcement on Friday, remaining at around 113.5 per dollar within an hour of the central bank’s statement.

Currency analysts said that for much of 2021, forecasts of a widening gap between Japanese and US interest rates encouraged funds to adopt a strategy of short trading on the yen.

Although some of these positions have been unwound in recent weeks due to concerns over the spread of Omicron, short bets were likely to be rebuilt in the coming days, traders said.

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