The Bank of Japan has left interest rates unchanged at its most recent meeting, but has made some changes to its stimulus programme which are designed to hold the yield on government 10-year bonds at zero. This will have the effect of keeping government borrowing costs down and, it is hoped, may spur private and business sector borrowing thereby stimulating the economy.

The Bank’s asset purchase programme will continue to pump in 80 trillion Yen into the economy per annum (approximately $790 billion). The Bank is continuing with its policy to hold interest rates for commercial banks with funds on deposit at the central bank at a negative value, thereby encouraging them to utilise funds and stimulate the economy. The Bank aims to encourage stable, low inflation of 2%.

The yield on long-term and short-term government borrowing costs are getting closer, a situation known as flattening the yield curve, which may have a deleterious effect on economic activity. Recently, 10-year bond yields fell to minus 0.3% which was only fractionally above short-term bond yields. The Bank hopes that the differential between long- (at zero) and short-term bonds (negative) will be enough to help insurers and pension funds somewhat – whilst they will not be making anything on such investments, they will no longer be losing money by holding them.

Initial reaction to the Bank of Japan’s move saw banking shares close nearly 7% higher. The interest rate remains unchanged at -0.1% where it has stood since January of this year. However, at that point, a Dollar was buying over 120 Yen; today it will get you just 100.8 Yen. This means that Japanese exports have appreciated by 20% in importing markets over the course of the year to date. Japanese goods priced in Dollars are worth 20% less when the profits are repatriated to Japan, but raw material costs (in Dollars) are effectively cheaper in Japan. Of course, this tends to offset inflation in Japan as imported goods and raw materials are cheaper to Japanese consumers.