Central Banking Vol XVI No 4 May 2006, 1st May 2006
In March, the Bank of Japan announced a change in its monetary policy. This did not involve any change in interest rates, but paved the way for a rise. At the moment commercial banks have more reserves on deposit with the central bank than they are required to hold, and in practical terms, the elimination of these excess balances is a necessary condition for raising interest rates. The change in policy indicates that these balances will now be run down and this appears to be already happening, as excess reserves fell sharply in both February and March.
While no definite timetable has been set, it is expected that the reduction in reserves will continue and thast, by August, the Bank of Japan will be in a position to end its zero-interest rate policy and will probably choose to do so around that time . In my article published in February, I pointed out that the central bank’s change in policy had been fiercly debated and that it was subject to unusually large risks. The debate has quietened down, as the change is increasingly seen as inevitable, but risks remain.
Full article: Fukui prepares to raise rates – ARWS Central Banking May 2006