AFTER THE FED AND ECB:
IT’S YOUR TURN, BOJ

28
J. Soedradjad Djiwandono
J. Soedradjad Djiwandono, Emeritus Professor of Economics, Faculty of Economics and Business, Universitas Indonesia, and Adjunct Professor of International Economics, S. Rajaratnam School of International Studies (RSIS), Nanyang Technological University (NTU), Singapore.

The unusual condition holds due to, among others, restraint on wage increases for a number of years, a policy based on maintaining a band of bond yield difference between Japanese bonds and US bonds. Every time the market yield touched the upper limit, BOJ intervened by purchasing bonds, and vice versa in a reversed condition. I am actually familiar with this technique, operating a similar technique during my time at Bank Indonesia, relying on an exchange rate differential between our Rupiah and the USD, instead of a bond yield difference, as the band limit of upper and lower bounds. 

However, it has been reported of late, in the Financial Times, for instance, that the market seems to want to have a different guideline for its day-to-day operations. This is the challenge BOJ must face and the one I am alluding to here. The US Fed and the ECB both learned their lesson from the Seventies experience, when the US waited for too long, till the arrival of the decisive Governor Paul Volcker as the new Fed Chair. He immediately acted by raising fed fund rates substantially, several times in fact, to quench uncontrolled inflation. Learning that lesson, Fed Chair Powell also raised fed fund rates substantially, by 75 basis points, and will repeat this in September. The ECB under President Christian Laggard did something similar for the EU. 

Both policies seem to work as expected, but there must be a cost to pay, as no economy could avoid Professor Milton Friedman’s dictum that there is no such thing as a free lunch.