Bank of Japan and Higher Interest Rates:

 Article Source:  https://mainichi.jp/english/articles/20220513/p2g/00m/0bu/031000c

Article:

TOKYO (Kyodo) -- Scaling back monetary easing is not appropriate as the economic situation in Japan is "completely different" from that in the United States and Europe, Bank of Japan Governor Haruhiko Kuroda said Friday.

Inflation is picking up toward the BOJ's 2 percent target due mainly to higher energy and commodity prices, but its sustainability is in question and whether price hikes will become "broad-based" is important, Kuroda said in an online speech to a research institute meeting.

The governor said that for Japan to see inflation above the target stably and sustainably, the pace of wage hikes should accelerate to support domestic demand.

Ideas:

The US and Europe is very different in that those economies in are relatively in terms of GDP growth and Japan is not there or even hasn't been there for many years. 

When an economy barely gets above one percent GDP growth every year, that's not a stable situation as any negative action could tip GDP growth into the negative range.

A key interest rate hike, while often used to tame inflation also has a lot of negatives such higher rates for those needing loans, higher interest for those with housing payments, and higher interest for those with household debt.

As to when the higher energy and materials costs will plateau is still not known, but maybe Kuroda has some information he is not sharing as to when they might begin to level off or even decrease.

Article:

His remarks reinforced the view that the BOJ will remain an outlier at a time when its U.S. and European counterparts are shifting toward normalizing policy to fight inflation. The prospect of divergent policy paths has weakened the yen.

The BOJ governor dismissed the view that the central bank is "a subsidiary of the government" as it continues to gobble up huge amounts of Japanese government bonds, defying criticism that the practice is debt monetization.

"Our independence is guaranteed by law in conducting monetary policy and operations. Therefore, the BOJ is not a corporation whose management is controlled by the government," Kuroda said in a question and answer session.

Ideas:

There is no sure thing that a rate increase is actually going to change the increase in inflation as it seems not much has changed in the US or the EU yet. 

We might think of this as a natural experiment meaning if the BOJ does nothing what kind of effect is it going to have on inflation compared to what the US and the EU is doing with a rate increase. So it remains to be seen what effects both actions are will have on the respective economies.

A weakened yen has usually been good for Japan as its always been an export oriented economy with a weaker yen adding more to Japan's currency account while imports reduce the currency account.

But in this situation the weak yen is close to record levels which means along with energy and raw material price increases the weak yen makes import prices even higher which have the effect, in terms value, not volume, of causing a trade deficit where the value of imports is more than the value of exports.

Yes, the BOJ's independence might be guaranteed by law but that might not mean the Japanese goverenment doesn't provide suggetions to help the economy, as the BOJ, by law, has the right to ignore any government suggestions.

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Earlier this week, former Prime Minister Shinzo Abe labeled the BOJ as a government subsidiary, drawing an immediate backlash from opposition lawmakers, who see the remark as undermining the central bank's independence.

"Japan's economy is still on its way to recovery from the significant downturn caused by COVID-19, and it has remained under downward pressure from the pandemic," Kuroda said.

"While the inflation rate is expected to rise to around 2 percent in the short run, this will be driven by energy prices and lacks sustainability. The bank, therefore, does not consider that scaling back the current monetary easing is appropriate," he said.

Ideas:

Yes, this inflation is not the kind of inflation any centeral banks wants to see. Most central banks would prefer to see an consumer demand led inflation, which might mean, by some standards an economy that might be running too hot or too much activity.

But Japan has never really had that problem except maybe before the 189/90 asset bubble crash.

The Japanease public are not the same kind of spenders that are in the US or the EU as they are for the most part more conservative in their spending.

Of course their are outliers in the Japanese spending public such maybe some in the younger groups in the past, who bought a lot of name brand products, lived at home with their parents and had money to burn, so to speak.

The continued increase in energy prices and raw material prices are defintely going delay the Japanease economy from fully recovering from the pandemic anytime soon.

Article:

Kuroda told a parliamentary session earlier in the day he will unlikely see inflation above 2 percent in a stable manner during his tenure until next April because it will take "some time."

Japan's core consumer price index, excluding volatile fresh food items, was up 0.8 percent in March from a year earlier and is projected by the BOJ to gain 1.9 percent in the year to next March.

At its policy-setting meeting in April, the BOJ made no change to its ultralow rate policy.

Ideas:

It must be noted that even at a increase of 0.8 percent Japan's CPI compared to other advanced economies is still much lower.

Of course Japanese consumers are usually more price sensitive compared to consumers in the US or the EU, and any price increase might be more critical for them compared to consumers in the US.

But to be fair, even US consumers are not very happy with what is going to with the price increases which are more easily passed on from suppliers compared to Japanese companies who don't pass on their costs as much.

The BOJ should keep the ultralow rate policy as it is now but at the same time the BOJ is probably beginning to hear a lot of noise relate to the different between the Japanease yen and the US dolllar.

Article:

It strengthened its commitment to maintaining long-term Japanese interest rates within an allowed trading range by offering to buy 10-year Japanese government bonds at a fixed rate of 0.25 percent every business day to defend its upper cap.

The BOJ'S policy has come under increased scrutiny after the yen has tumbled to around 20-year lows against the U.S. dollar. Abe said Monday the government could roll over its debt when the repayment deadline comes because it is a government subsidiary that can purchase debts.

Abe's economy-boosting program known as "Abenomics" entailed aggressive monetary easing. Current Prime Minister Fumio Kishida shares the view that a bold monetary policy is necessary.

Ideas:

The BOJ has continued to buy government bonds as a way fund the government and other areas. As most of Japan's debt internal it doesn't need to worry that its going to be like Greece in 2010 when Greece had to go to the EU central and ask for more funds because most of its debt was external and not internal.

There might be the idea that Japan's monetary policy might not be progressive or bold but instead conservative as it doesn't make changes very often in its key rates, meaning it takes it time to think through what to do and doesn't change much even though inflation is now very for Japan.

Part of the "Abenomics" strategy was to open the economy more to international tourism, but letting everyone in to increase GDP growth.

If Prime Minister Kishida shares the same view the Japanese government should open the country again to tourism, and not just group tours.

As of today many tour companies are in confusion in Japan and globally as to how to do the visa situation and the group tour situation. As such many small and medium tour companies have decided not participate in the program

The Japanease government should just go back to the 90 free visa program and which is simple for everyone. Just arrive at the airport, such as Haneda and get the 90 stamp in your passport, along with showing where you are going to stay in Japan.

Article:

With the U.S. Federal Reserve in a rate hike cycle, long-term interest rates are on an uptrend overseas. The BOJ has taken on the difficult challenge of keeping Japanese bond yields at extremely low levels to buck that trend.

The COVID-19 pandemic and heightened uncertainties over the crisis in Ukraine following Russia's invasion have given the BOJ reason to stay the course and support the economy.

Higher commodity prices could hurt the economy of resource-poor Japan, and accelerating inflation in other advanced nations could cause financial instability, including in foreign exchange markets if their central banks speed up reducing monetary stimulus, Kuroda warned.

"In this regard, it is necessary to bear in mind that sharp fluctuations in foreign exchange rates would increase uncertainties about the future and negatively affect the economy by, for example, making it more difficult for firms to formulate business plans and prompting them to postpone business fixed investment," he said.

Ideas:

The Bank of Japan has no choice but the remain on its present course of a low interest rate policy as there are just too many negative factors effecting the Japanease economy at this time.

In this situation a key rate increase is going to make the situation even worse for some or many in the Japanese economy.

Unfortunately, just riding out the weak yen might be the only strategy that the BOJ can do at this time.

The Japanease government might increase in subsidy program for suppliers, it might reduce taxes on gasoline prices, it might use price controls on essential food such as eggs, milk, bread, rice, and so on to help those with low-incomes and or fixed incomes.

It might even put some price controls on home every prices to help families who are seeing increases in electricity and air conditioning as the summer will bring even higher energy bills for families and households.

Have a nice day and be safe!