BOJ and Policy Rate: Updated June 20, 2024.

 

BOJ likely to keep policy rate unchanged, debate bond purchases

Article Source:  https://mainichi.jp/english/articles/20240613/p2g/00m/0bu/017000c

Ideas:

Most likely the Bank of Japan understands that if it changes its ultra-low policy too fast and too much, it could cause a lot of side effects in the Japanese economy. 

At the same time, the Bank of Japan might be under pressure to increase the rate, as the weak Japanese yen is causing major challenges for importer in Japan.

So the Bank of Japan has move slowly, and at the same time, the Japanese economy, again, has contracted, which means the Bank of Japan will most likely not do much related to increasing the key rate.

The Bank of Japan might not guide monetary policy that influences foreign exchange rates, as it doesn't want to be seen or labeled as a exchange rate manipulator which some central banks are considered to do.

Its a very thin line between currency balance and manipulation and the Bank of Japan might be skilled at balancing and not manipulating.

The weak yen is both a positive and a negative for the Japanese economy, as it hurt importer and importers but helps foreign tourists that come to Japan.

There is a wide variance between the US key rate and the Japan key rate, which influences the Japanese yen, so the Bank of Japan, looks like, this year, its not going to get much help from the US, as the US is only going to lower the rate one time.

The Bank of Japan might say its going to do something, but in reality, there is not much it can do at this time, as the US/Japan key rate variance is just too far apart.

Inflation in Japan might be decrease some, but it still too high for most Japanese households and as such consumer spending is going to remain reduced until inflation is reduced to a level that Japanese households feel good again.

Central banks, including the Bank of Japan, might spend, as needed, within limits as a way to balance its currency with other currencies, but they have to be careful to make sure they are not manipulating the currency.

Its going to take time for Japanese households to see the effects of the wage increases as inflation has overshadowed the wage increases and there might not be any real notice until after the summer season this year.

But it must be remembered that not all Japanese households or Japanese workers got the same wage increase or the same amount that large company workers got, which means there is still going to be a major discrepancy between large company employees and small and midsize workers.

The Bank of Japan is well aware that a sharp increase in borrowing costs will further hurt the Japanese economy along with reducing consumer spending and business investment spending too.

The Bank of Japan might continue to buy government bonds, but it only going to kick the can down the road, meaning more government debt, which at the present time, as the highest government debt to GDP than any other advanced economy.

There is always debate between government spending and reduced government spending, as there are examples of positives and negatives on both sides of the issue.

Like households, there is always talk of reducing spending and sticking to a budget and even though the Bank of Japan says it might reduce bond buying, most likely, it will continue, as needed to help the Japanese economy.

And yes, the Bank of Japan is going to be very cautious, maybe even too cautious about increasing interest rates in the future. 

But its better to be cautious than make a mistake with increasing interest rates too fast and too much, as there are many side effects related to increased rates.

The 2 percent inflation target is a long way off and it might not happen until 2025 or later, as the weak yen, inflation situation along with a stagnant economy is not going to change anytime soon.

Have a nice day and be safe