Bank of Japan, Again: Updated September 5, 2024.

 

Bank of Japan debated future rate hikes if weak yen keeps driving inflation

Article Source:  https://mainichi.jp/english/articles/20240509/p2g/00m/0bu/033000c

Ideas:

The idea among central banks is if you increase the key rate, it acts like a deterrent for further borrowing and spending in the economy, which dampens demand, which will cause inflation to decreases as companies lower prices due to less demand.

But the past then years, the Bank of Japan, has not played by the same rules as the US or the EU, they haven't increased the key rate, as they suggested the Japanese economy was/is just too weak to handle any side-affects related to a rate increase.

That might be well and good as not economies are exactly the same, so maybe the Bank of Japan did the right thing as maybe the Japanese economy is/was just too weak for a rate increase.

The weak Japanese yen is a positive and a negative depending on whether you are an Japanese exporter or a Japanese importer or part of the domestic Japanese economy.

For Japanese exporters, the weak Japanese yen gives an exporter more for your Japanese product, such as cars in the US or the EU.

For an importer, unfortunately, the weak Japanese yen increases imports prices, as Japan resource-poor country and has to import much of what it needs.

The weak yen might be negligible on inflation, but tell that to Japanese households who have had to endure continuous inflation since the pandemic or even before the pandemic.

Cost-push inflation, meaning Japanese companies pass-on their energy and raw material costs to the next in the supply chain, including the final customer is not going away, and even more, as companies have increased wages, which means they will increase prices to cover the wage increases.

Foreign tourists, or inbound tourism is a boom for Japan at this time, and with the weak Japanese yen foreign tourists have more purchasing power, to buy more in Japan, which is good for Japanese businesses.

So maybe just maybe the weak yen is not good for the local Japanese economy or business, but it actually might be slightly good as it brings more foreign tourists to Japan, who spend a lot of money in Japanese businesses, hotels, restaurants and so on.

The Japanese economy is always going to be stuck in its current situation as it has to import much of what it needs and is subject to global raw material prices and energy prices.

And yes, the Bank of Japan has not followed the US and they EU in continuously increasing the key rate. The US key rate might be close to 5 now while the Japan key rate is still close to zero which is a major variance affecting the Japanese yen.

However, the US has not increased the key rate for sometime, as is suggesting it will begin to cut the rate in the future which will bring the US rate and Japanese rate closer together, but not that much just yet.

Core-core inflation is always increasing in Japan, or it has the past few years, and it doesn't look like it going to  be much different the rest of 2024 and maybe even in 2025.

Financial markets are always on the look out for signs about what the Bank of Japan is going to do and even what the US Federal Reserve is going to, and even what the EU central bank is going to do. 

They sit on edge for anything that they think might change the market and they are, for the most part, very reactive to anything, and when something does happen they react strongly up or down and never really looking at the big picture of what is going on

The Bank of Japan most likely holds most of the Japanese government bonds, as they buy the bonds as a way to improve the Japanese economy. While that might be a good short-term fix it doesn't do much of the heavy debt the Japanese government has, as it has the highest debt to GDP ratio compared to other advanced nations.

Its going to take some time for the Bank of Japan to normalize its holding or it ultra-low policy as its kind in a quagmire at the present time, with the Japanese economy in a fix between the weaker than Japanese yen, higher that needed inflation, and higher than needed import prices.

Have a nice day!