Key facts
- Japan plans to improve management of its $1.3 trillion foreign exchange reserves.
- The reserves are intended for potential yen intervention and to boost returns.
- A draft economic blueprint signals the government's preference for the Bank of Japan to keep borrowing costs low.
- The blueprint urges the BOJ to coordinate monetary policy with the government to reflate growth.
- The BOJ is expected to hold rates steady at its upcoming July meeting but will update forecasts.
- The BOJ recently raised its policy rate to 1% and has signaled further tightening is possible.
Japan's government is planning to enhance the management of its substantial foreign exchange reserves, estimated at $1.3 trillion, with the dual aims of increasing returns and supporting the economy. A draft of the government's long-term economic blueprint, seen by Reuters, indicates a preference for the Bank of Japan (BOJ) to maintain accommodative monetary policy to bolster private demand and achieve stable price rises.
The blueprint, due to be finalized in July, emphasizes the need for the BOJ to coordinate its policy decisions with the government's growth objectives, citing legal provisions that mandate such alignment. This dovish tone could influence the BOJ's future decisions on interest rate hikes as it transitions away from years of ultra-low borrowing costs.
The government has pledged to take "nimble and sufficient steps" to prevent a return to deflation and to boost long-term growth potential. The draft specifically urges the BOJ to "work closely with the government to sustainably and stably achieve its 2% inflation target." The central bank is widely expected to hold its policy rate steady at its upcoming July meeting, though markets will scrutinize updated economic forecasts for signals on future tightening.
While the BOJ recently raised its policy rate to a 31-year high of 1% and has signaled readiness to tighten further due to persistent inflation, political pressure could complicate additional rate hikes. A government representative reportedly conveyed to the BOJ the need for "proactive and appropriate action" if the economy deteriorates, suggesting potential displeasure with rate increases.