The News
Japan’s central bank raised interest rates by 0.25%, a tightening of monetary policy that signals increasing confidence in the country’s economic recovery.
Japan has for decades battled falling prices and sluggish growth, spurring its central bank to keep borrowing costs low to encourage people to buy things and businesses to invest. It avoided the runaway inflation that many developed economies saw after the pandemic, and so kept interest rates low even after the US, Europe, and others began hiking in 2022.
Prices have started to rise, forcing the Bank of Japan to choose between keeping a lid on inflation and stepping in to aid the yen, which has hit near-record lows. Wednesday’s increase in baseline borrowing rates from around 0.1% to 0.25% is the second this year.
The bank’s governor, who replaced a long-serving predecessor last year, did not rule out a further raise this year, at a time when most Western economies expect to be cutting.
SIGNALS
Hike indicates a shift in bank’s thinking
The decision to hike rates again this year indicates a “regime change” at Japan’s central bank to take a more hawkish approach to the nation’s fiscal policy than in the past. Two rate hikes within months of each other “indicates [the bank’s directors] are trying to get ahead of the curve on inflation, a major shift from its previous stance of lagging behind the curve out of concern over the economy,” a Japanese economist told Bloomberg. If there is a further rate hike, that will likely occur in October or December, economists predicted.
Bank trying to prevent knock-on effect of weak yen
The yen is at 38-year lows against the dollar, which makes imports — especially oil and gas, which Japan has little of at home — more expensive. Wednesday’s hike puts the yen “on more solid ground,” wrote analysts at ING, the giant Dutch bank. Economists are now looking ahead to a third rate increase this year, particularly as “real interest rates remain negative, so the BoJ couldn’t risk further weakening the yen, which would dampen consumption,” they added.
US, Japan narrow interest rate gap
In the US, analysts are waiting for the Federal Reserve to start cutting interest rates as the economy cools post-pandemic. Chair Jerome Powell recently told lawmakers that cutting “too late or too little could unduly weaken economic activity and employment.” The opposing directions of the Fed and the Bank of Japan will “narrow an interest rate gap that has driven record weakness in the yen, marking a big shift for global currency markets,” the Financial Times noted. Indeed, narrowing rates between the US and Japan has helped to rally the yen, which is now bouncing back from a nearly four-decade low. “The yen’s rebound also gives [Japan’s] central bank a chance to hike rates without giving markets the impression it is directly targeting yen moves through monetary policy,” Reuters reported.