Should Bank of Japan Purchase Foreign Bonds?

Forex News

Koichi Hamada (an economic adviser to Prime Minister Shinzo Abe) claimed BoJ should start purchasing foreign bonds. Now that Haruhiko Kuroda has been appointed for a second term as the Governor, buying foreign bonds would improve the economy and Bank’s policy. Hamada says: "Under the BOJ law, the finance ministry holds jurisdiction over currency policy. But I hope Kuroda would consider having the BOJ buy foreign bonds".

Such move, however, would harm the exchange rate, that’s why it is a bit too risky. Yen’s dynamic is a concern for Japanese policymakers, who insist: "The yen rose after the announcement of the government's BOJ nominees. There's a limit to how much monetary easing can keep yen rises in check." They are convinced BoJ’s bond purchasing harmed the market and caused concerns about stronger yen ruining the economic recovery.

If BoJ buys foreign bonds from financial institutions in exchange for yen cash, banks will turn up with larger funds, that could be borrowed to firms and households. That, in turn, would improve the growth. But, before that, BoJ would have to weaken the yen so that the cost of imports is increased and thus the inflation is boosted. This bold idea is likely to be opposed by some of Great 20 members but it remains a rather rational tool for stabilizing Japanese inflation and economy.