Editorial: Careful end of monetary easing needed as BOJ navigates price surges
The Bank of Japan (BOJ) on Oct. 31 decided to modify its large-scale monetary easing policy, just three months after it raised the de-facto cap on long-term interest rates. The central bank was pressed into another policy shift due to greater than expected upward pressure on interest rates.
The BOJ has maintained an easing policy, applying a negative interest rate of minus 0.1% to short-term interest rates while guiding long-term interest rates to around zero percent.
Ideas:
Perhaps the Bank of Japan is seeing and feeling pressure to modify its ultralow policy, but not drastically changing it too much. What has worked, for the most part in Japan, might have not worked in other economies.
The variance between the US interest rate and the ultralow Japanese rate, has put pressure on the Japanese yen to weaken even more, which is putting pressure on Japanese importers because of the higher import prices.
But at the same time a weak Japanese yen is good for Japanese exporters, who can get more for their products in overseas markets.
Its also a bonus for foreign tourists who go to Japan, as it gives them more purchasing power with the weak yen.
The bank of Japan needs to think what is best for the economy, a weak yen that favors Japanese exporters and the huge numbers of foreign tourists who spend a lot in/on the Japanese economy or the Japanese domestic economy.
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Yet, certain fluctuations have been allowed for long-term interest rates, with the BOJ raising its ceiling from 0.5% to 1% in July. This time around, the central bank will allow the cap to rise above 1% to a certain extent.
Long-term interest rates in the U.S. have remained high due to prolonged monetary tightening and the rates in Japan were drawing close to the 1% ceiling. The BOJ's move is apparently aimed at curbing price hikes spurred by the yen's further decline against the dollar.
Ideas:
Most likely the US Federal Reserve, the US central bank and the Bank of Japan will never see eye to eye on how to get the variance between the US interest rate and the Japanese ultralow rate, as they use different approaches and strategies respective for each country.
The US Federal Reserve has hinted in 2024 they begin to lower the key rate, maybe three times, which will reduce the variance between the US rate and the Japanese rate.
Currency changes are not easily controlled and the increase in prices, which for a long time was not common in Japan, but these days as many companies are seeing their profits margins eroding because of energy and raw material costs increases they now have no choice but to pass-on their increased costs to the next in the supply chain, including maybe the final retail customer.
Some has suggested that 2024 is going to much of the same, meaning inflation will continue in the Japanese economy.
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BOJ Gov. Kazuo Ueda stressed during an Oct. 31 press conference that his bank will "patiently continue with monetary easing." The bank estimates that the current policy has yet to bring about a positive economic cycle of concurrent wage and price hikes.
The problem is that massive monetary easing is getting out of step with the economic and price status quo.
Ideas:
The Bank of Japan doesn't want to admit that maybe its current policy hasn't achieved the inflation results that are needed for the Japanese economy.
But to be fair to the Bank of Japan, most central bank strategies rarely achieve its intended result.
Increased wages are all on companies and what they feel they need to do. The Bank of Japan and Prime Minister Kishida can only suggest that companies increase wages.
And for the most part, 70 percent of workers in Japan don't work for large companies as they work for small and medium sized companies, and most of them didn't get wage increases in April of 2023.
So while large companies in 2024 will again increase wages their is no guarantee that small and medium-sized companies will do the same in April of 2024.
It seems the Bank of Japan has just let inflation run its course, naturally, and not really doing anything to decrease it, hoping that companies will step in and increase wages which might lower the stress on households in the Japanese economy.
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The BOJ has revised its outlook for the consumer price index upward to 2.8% for fiscal 2023 and 2024. Including fiscal 2022, this will be the third consecutive year that the index exceeds the BOJ's price stability target of 2%.
Yet, Ueda finds Japan remains a far cry from achieving target levels of inflation. After seeing whether wage hikes continue in the 2024 annual spring labor negotiations, the BOJ chief will look into whether a policy turnaround will be needed.
Ideas:
To be fair, Japan's inflation has not reached the levels of inflation that was in the US at around 6 percent at one time. So even the Japan CPI at 2.8% is still relatively low compared to the US, at one time and the EU.
Most central banks prefer to see inflation between 2 and 4 percent, as they feel that range is a manageable level.
But the Bank of Japan keeps insisting on a 2 target, and maybe there is something about 2 percent that is more manageable than a 3 percent level.
Again, it seems the Bank of Japan is relying on companies to increase wages again in 2024 like they did in 2023, but the problem is only the large companies, in 2023 increased wages and who knows really what is going to happen in April of 2024.
If a lot of companies don't increase wages in April of 2024, it will be interesting to see what the Bank of Japan is going to do.
In April of 2023 wage increases were only about 3.5 percent, so if companies don't increases wages at least that much what is the Bank of Japan gong to do?
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Inflation-adjusted real wages have posted negative growth for the 17th consecutive month. Ueda is apparently concerned about factors such as this.
It's the BOJ's mission to achieve price stability through its monetary policies, thereby improving the national economy. It is only natural for the bank to flexibly review its policies in accordance with changes in the real economy.
Ideas:
Inflation-adjusted real wages are wages minus inflation, which reduces real income and reduces any extra income Japanese households depended on for extra spending in the economy.
So there has been a decrease in wages for 17 consecutive months, which means the Bank of Japan maybe hasn't done much to reduce the stress on wage earners or households.
Again the Bank of Japan needs to think carefully what it needs to do, if anything that it has different scenarios to think think about.
For example what does it do the help the domestic economy? What does it do the continue with a weak yen for Japanese exporters? What does it do with a weak yen and foreign tourists who spend large sums of money in the Japanese economy?
Most likely, there will not be any real or significant changes in 2024 as the Bank of Japan doesn't want to upset the financial markets and cause too much uncertainty or change.
There might be some tweaks here or there and there might be some slight interest rate increases but not too much as too cause strain on the Japanese economy.
More than likely the Bank of Japan might want to see a continued weak Japanese yen, but maybe not as weak as it is now. But again and weak yen brings in a lot of foreign tourists who spend a lot in the Japanese economy.
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Monetary policy trends greatly impact interest rates for corporate and housing loans and affect everyone's lives. If monetary easing is prolonged beyond what's necessary, it could trigger severe price surges or even an economic bubble. The BOJ is urged to steer the situation with great caution.
By discerning the economic and consumer price outlook in a level-headed manner, the central bank must move toward a well-timed exit from its easing policy.
Ideas:
Because monetary policy affects many factors in the Japanese economy, maybe the reason the Bank of Japan has kept the interest rate low compared to what the US or the EU have done.
But, yes, if monetary easing is prolonged too much and prices continue increase it might case undue stress for the Japanese economy.
Its kind of like medicine and side effects. If you take some medicine, there is the possibility of side effects, and the same with increasing the key rate, there are side effects. But at the same time, if you don't take the medicine, there might be even worse or more side effects, and the same with keeping the rate low in Japan, for too long, there could be some real side effects such too many prices increases.
But the Bank of Japan has to decide when to change its current ultralow policy for the good of the Japanese economy.
Have a nice day and be safe!
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