Tokyo – The Bank of Japan (BOJ) has taken significant steps toward normalizing its monetary policy, marking the beginning of its quantitative tightening era. This shift came under the watchful eyes of market analysts as the central bank implemented the largest interest rate increase seen in nearly two decades.
On January 24, 2025, the BOJ declared it would cease new lending under its fund-provisioning program, starting from this July. This program had previously boosted the economy post-2012, providing banks with ¥77 trillion (approximately S$672 billion) as of January 20, 2025, which accounted for about 10.4% of the central bank's overall balance sheet.
“Although it got little attention, ending the funding program is a big decision,” said Mr. Kentaro Koyama, chief Japan economist at Deutsche Securities. The cessation of the program indicates the BOJ's intention to move away from the radical monetary easing policies adopted over the last decade.
Real interest rates remain negative even with the recent hike, as noted by Deputy Governor Ryozo Himino. “Given the state of real rates, which continue to be very much in the red, the easy monetary environment’s been maintained,” he said during his speech at Hitotsubashi University. The BOJ’s monetary stance hinges on economic and price developments, with plans to adjust rates accordingly.
The upcoming end of the lending program also signals the termination of purchases of commercial paper and corporate bonds, previously announced to conclude by January 2028. Together with the recent reduction of government bond purchases, the BOJ is projected to decrease its balance sheet by more than 15% over coming years.
While the BOJ is moving toward tightening measures similar to those seen by global counterparts, it must tread carefully not to alarm market participants. The Federal Reserve, which began tightening its policies earlier, had to slow its efforts to unwinding its balance sheet due to market disruptions.
Mr. Koyama observed the potential impact of the BOJ's lending program discontinuation on the demand for government bonds used as collateral, predicting this might spur upward pressure on yields as banks seek alternative stable funding sources.
The historical backdrop of the BOJ's quantitative easing can be traced back to the European debt crisis, when the previous governor initiated the loan program to mitigate economic stagnation. Over time, the structure of the program adapted to the changing financial climate.
With the central bank's assets currently resting around ¥740 trillion, about 79% of its portfolio is invested in long-term government bonds, reflecting its heavy reliance on traditional stimuli.
The scope of these measures highlights the unique challenges faced by the BOJ amid Japan's economic environment characterized by deflationary pressures and structural limits on growth. Japanese fiscal and monetary policies continue to navigate complex terrain, attempting to balance economic prosperity with stable price levels.
Critics of the prolonged easing period argue such measures have distorted market dynamics and limited financial sector profitability. Conversely, advocates of the BOJ’s strategies remind us of their necessity during uncertain global conditions.
Moving forward, how the Bank of Japan weathers this transition period will hinge on not just domestic economic indicators, but also on global monetary trends and geopolitical events influencing economic stability.
One thing remains certain: the BOJ’s actions will continue to be closely monitored by financial markets, analysts, and policymakers alike as Japan strives to redefine its monetary framework.
With tightening expected to evolve progressively, the future economic climate remains uncertain as the bank gears up for what is anticipated to be the largest fiscal adjustment since the late 20th century.