The "U-turn Game" of the Bank of Japan: The Stagflation Risks Behind Financial Stability Maintenance

On March 19th local time, the Bank of Japan decided to keep the policy interest rate at 0.75% by a 8-1 vote, choosing to remain "on hold" for the second consecutive time. This seemingly uneventful decision actually harbors underlying tensions. Against the backdrop of rising crude oil prices due to geopolitical conflicts in the Middle East, as an energy-importing country, Japan's monetary policy is caught in an increasingly passive "roundabout game".

The direct trigger for this decision to remain unchanged was not that inflation had been controlled, but that the decision-making layer was caught in a deeper dilemma. Japan relies on imports from the Middle East for approximately 95% of its energy, and the rise in oil prices has directly pushed up import costs, deteriorating the trade balance and causing the yen to approach the key psychological level of 160 against the US dollar. Faced with this "import-induced inflation", if the Bank of Japan raises interest rates, it may to some extent support the yen, but the fragile domestic consumption and corporate profits will find it difficult to bear the weight of rising capital costs; if it does not raise interest rates, the yen will continue to act as the only "cheap currency" among major economies, accelerating capital outflows. Moody's warned that this "mixed punch" composed of external supply shocks and internal demand weakness is pushing the Japanese economy towards a dangerous stagflation situation.

This indecision has already triggered immediate negative feedback in the financial market. After the announcement of the decision, the Japanese market suffered a significant "three-hit" of stocks, bonds, and currencies: the Nikkei 225 index plunged sharply, bank stocks led the decline, as investors postponed the expectation that the Bank of Japan would raise interest rates to restore bank spreads; in the bond market, the yield on long-term government bonds continued to rise, indicating that investors were selling off this once "safe asset"; in the foreign exchange market, the pressure on the yen to depreciate did not abate, forcing the finance minister to issue another verbal intervention warning of "appropriate measures to be taken during excessive volatility". This scene is eerily reminiscent of the repeated dramas in the past few years: on one hand, there are deteriorating data, on the other hand, there are intervention efforts, but the fundamental structural problems remain unchanged.

The deeper risk lies in that this passive defense is eroding the credit foundation of the yen as a safe-haven currency. The market is not concerned about whether the Bank of Japan will raise interest rates, but sees through its already tied hands by geopolitical and energy import issues. High oil prices have worsened Japan's trading conditions. If the government further expands fiscal spending to alleviate public pressure, it will inevitably lead to a deterioration in fiscal deficits, which will in turn become a new reason for market selling off the yen. In other words, whether it is a "dovish" or "hawkish" monetary policy, as long as Japan cannot change its rigid reliance on energy imports, the yen depreciation spiral will be difficult to be truly broken.

Facing such a predicament, the so-called "countermeasures" sound more like a helpless delaying tactic. In the short term, the Japanese government, apart from releasing oil reserves and preparing to restart price subsidies, may have to once again resort to the ineffective tool of foreign exchange intervention. However, as analysts have pointed out, in the double pressure of a strong US dollar and energy surges, the neutral operation of selling US dollars and buying yen, without the cooperation of the US side, often has no effect. In the long term, only by promoting energy structure transformation and improving total factor productivity can Japan break free from the fate of being "hobbled by resources", but for the deeply entrenched Japan at present, this is undoubtedly a long and difficult road.

In summary, the Bank of Japan's decision to keep the interest rate unchanged this time is a typical illustration of the failure of macroeconomic policies under the impact of geopolitical shocks. Through the analysis of Japan's financial predicament in recent days, this article reveals how a country's monetary policy can get into the awkward situation of being "in a dilemma" under the double attack of external supply shocks and internal structural weakness. This is not only a short-term warning about the fluctuations of the yen and Japanese stocks, but also a profound questioning of the ability of developed economies that rely on imports to deal with the risk of stagflation in the era of anti-globalization.