Editorial: Bank of Japan Policy: Ideas Later

Editorial: Bank of Japan's rate hike a chance to break away from economic complacency

Article Source:  https://mainichi.jp/english/articles/20240320/p2a/00m/0op/017000c

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Article:

The Bank of Japan (BOJ) has decided to lift its negative interest rate policy, and raise the target for short-term interest rates from the previous minus 0.1% to around 0 to 0.1%. It was the first time in roughly 17 years for the BOJ to hike interest rates, the last time being in February 2007.

The BOJ's move is a significant shift from its bold "monetary easing of a different dimension" that continued for over a decade. For Japan, it is a major step toward the revival of a "world with interest."

The central bank policy of holding long-term interest rates to extremely low levels will also be abolished. Additionally, the BOJ will halt purchases of exchange-traded funds (ETFs), which include large numbers of stocks.

Initially, the bold monetary-easing policy brought higher stock prices and helped to alleviate the yen's strength, but recently, a distortion of market functions and other adverse effects had stood out. Unilateral easing is now finally being corrected.

Adverse effects of prolonged policy need to be verified

The BOJ had explained that it would continue its easing policy until it saw sustained inflation of 2% accompanied by wage growth.

Due to the global surge in material prices, among other factors, the rate of increase in consumer prices has continued to surpass that target.

Meanwhile, during spring wage negotiations this year, figures compiled by the Japanese Trade Union Confederation showed the rate of wage increases averaged over 5% -- a high level.

The BOJ has been monitoring trends in prices and wages, and it judged the situation where both wages and prices were rising to be a "virtuous cycle." BOJ Gov. Kazuo Ueda said in a news conference, "The easing policy of a different dimension has served its role."

 largely due to overseas factors such as continuing high energy prices; the increase cannot be authoritatively attributed to Japan's bold monetary easing.

The easing policy was spearheaded by former BOJ Gov. Haruhiko Kuroda, who took office in 2013, with "Abenomics," the economic policy mix of the late Prime Minister Shinzo Abe, at its center. They boasted that the 2% target would be achieved "in about two years," but prices did not rise at all.

With deepening desperation, the BOJ outlined new easing policies one after another, and even went ahead with experimental policies that other central banks overseas had retreated from, such as negative interest rates. We must not turn a blind eye to the side effect of these unorthodox policies.

As a result of its continuing large-scale purchases of government bonds to lower long-term interest rates, the BOJ now holds more than half of outstanding government bonds.

Over the past few years, the excessively weak yen has led to increased import costs and has put pressure on the finances of households and small- and medium-sized companies. If the side effects outweigh the merits, then the policy can by no means be called effective.

The BOJ has been analyzing easing policies since the late 1990s. It should also earnestly analyze the pros and cons of the bold monetary easing measures Japan has seen.

A bigger issue is that the government and industries have gotten comfortable with the ultralow-interest rate environment and have postponed necessary reforms.

The aim of Abenomics was to boost the economy through three "arrows" combining monetary policy, fiscal stimulus through government spending and growth strategies. In actual fact, however, the nation saw repeated pork-barrel spending and there were few growth strategies directly linked to strengthening industrial competitiveness and expanding domestic demand.

Irresponsible spending did not stop even after the launch of Prime Minister Fumio Kishida's administration. That's because the burden of managing public finances by relying on government bonds is light as long as bold easing continues.

Consideration of pain inevitable

Companies that benefitted from the correction of the high yen prioritized cost-cutting measures, and simple profit-hoarding management stood out. Postponing investment in facilities and improvements to employee compensation packages has contributed to a decline in Japan's international competitiveness.

Monetary policy is supposed to support the economy behind the scenes. Only when the government sets out clear growth strategies, and when companies make efforts in technological innovation and toward improving productivity, will the path to a robust economy open. With the latest policy change, Japan should be prepared to break away from a "lukewarm" state.

There is a risk that the resumption of interest rate hikes after about 17 years may unsettle the market and the public. Efforts must also be made to ease the impact of economic fluctuations.

Ueda stressed that "an accommodative financial environment will continue for the time being," but financial institutions are expected to accelerate interest rate hikes.

While there are merits for those with savings, higher interest rates on mortgages and loans will increase the burden on borrowers and could act as downward pressure on the economy.

Even if the BOJ's inflation target is realized, we must avoid a situation where a large number of people cannot bear the increased burden. The government should put effort into policies to alleviate the "pain" of households and companies and work to correct disparities.

In a "world with interest," the true strength of Japan's economy, including fiscal discipline, will be tested. We must make this an opportunity for the economy and society as a whole to emerge from long-term stagnation.