Thoughts on the Bank of Japan...

Happy FOMC Wednesday to all who celebrate! Particularly sharp readers may have noticed that the US Dollar Index has now given back gains made earlier this week. On Wednesday morning (very late Tuesday evening in the US), the Bank of Japan's policy committee by a vote of 7 to 2, decided to increase its overnight "policy" rate to 0.25%, which is the highest that this rate has been since the year 2008. The BOJ had ended its negative interest rate policy back in March ahead of this move as financial conditions have changed in Japan. There had been pressure from senior government officials core consumer level inflation has now run above the BOJ's 2% target for 27 consecutive months after decades of what would be seen as a deflationary environment. In addition to core inflation that recently printed at 2.6% year over year for June, the Japanese economy has been mired in a state of contraction for four consecutive quarters as the debased Japanese yen has damaged standards of living and consumer spending in that nation. In addition, the BOJ laid out the framework to reduce its quantitative easing program (yes, the BOJ was still doing QE) from its current purchases of Y6T ($39B) worth of bonds per month to half that much. BOJ Gov, Kazuo Ueda commented, "We plan to continue raising our policy rate and adjust the degree of monetary accommodation" Tightening policy with the economy in the hole? My opinion? The Bank of Japan had to choose its poison, and ultra-loose monetary policy had long ago stopped working its magic. The pain of potentially accelerating that economy's decline through tighter monetary policy apparently scares the BOJ less than does the continued decline of the economy through the diminished purchasing power of the Japanese yen. There is unfortunately no obvious path I see for now, for the Japanese economy to avoid experiencing a continuance of its current state of financial pain.