BOJ and Possible Rate Increase: Updated Nov, 28, 2024.

BOJ chief signals further rate hikes to prevent sharp inflation

Article Source: https://mainichi.jp/english/articles/20241118/p2g/00m/0bu/015000c

Ideas:

The Bank of Japan, until recently has erred on the side of caution, and has not increased the key rate, until last summer, as they have considered the Japanese economy too weak to increase rates. 

But there is now a new governor for the Bank of Japan who seems to be taking a different approach as the previous governor didn't increases rates for a very long time.

What the Bank of Japan is not going to do is signal any real rate increase as they now it might cause havoc in the financial markets, like what happened last summer.

If the Bank of Japan does increase the rate, it might not be that much, for example from 0.25 points to 0.50 might be about right as they don't want the key rate to have any side-affects for the Japanese economy.

In years pasts, the BOJ was very concerned about the possibility of side affects so they erred on the side of caution and didn't increase the rate at all.

But because of the variance between the US key rate and the Japan key rate, for example  the US at maybe 5.0 points and Japan at 0.25 points, the large variance might be causing the Japanese yen to be as weak as it is.

Maybe the Bank of Japan knows it needs keep ahead of the curve, and increase the rate just in case inflation does begin to increase too much, as again, in the past the BOJ felt the Japanese economy was just too weak to increase the rate.

Again, in years past, as the US and the EU were increasing the key rate to decrease inflation, the Bank of Japan was not increasing the key rate, and the variance between the US and the EU and Japan has reached a level that it might be affecting the Japanese yen which is very weak and causing import prices in Japan to be higher than usual.

But the BOJ has only increased the rate once or twice maybe since last spring, so maybe December might be the correct time finally increase the key rate again.

The US economy has remained relatively strong compared to the rest of the world, but there is always the chance of inflation creeping up again, along other developments depending on what the new US administration does in the future/

And unfortunately, there seems to be the possibility of a new trade war between China and the US which could affect the Japanese economy as Japan and China trade with each other a lot.

And unfortunately, politics being politics, the new US administration might try to undo what of what the previous US administration did after the pandemic and try to take credit for any positives related to the US economy.

And yes, the weak Japanese yen as definitely affected the domestic Japanese economy and import prices which affect many if not all Japanese households.

What the BOJ doesn't want to do is look like or be is a currency manipulator which potentially could affect Japan's future credit rating.

It must be noted that 70 percent of Japanese workers don't work for large Japanese companies, which got the largest wage increases while the rest might have gotten much smaller wage increases.

And yes, companies need to pay for the wage increases so they have increased prices, which of course affect all and not just the large company workers.

It should be noted that inflation is not really a bad situation, as an increase in inflation could signal an increase in demand, and in Japan, which has been under a deflation situation for a long time, it might indicate a positive note for the Japanese economy.

The Bank of Japan's target of 2 percent inflation is sometimes a little unclear as they seem to not want inflation to be above 2 percent or they want inflation to be lower than 2 percent, which is what most economies want.

Quite possible they might feel if inflation does get above 2 percent that is a good indication the Japanese economy is starting to move in the right direction as there is now more economic activity moving through the Japanese economy.

The Bank of Japan didn't increase the key rate for maybe 10 years, as the had an ultra-low policy which they felt was needed at the time to stimulate the economy, get companies and households to borrow more and get more spending in the Japanese economy.

But for whatever reason, including the pandemic. the Japanese economy has been stagnant for a very long time and never moved out of its stagnation phase.

And again, inflation is not necessarily bad, it could indicate more positive economic activity taking place, with more demand for products, more spending by companies and households, which are all needed to get the Japanese economy moving again., and not jus companies passing-on their labor, energy, and material costs the next in the supply chain.

Have a nice day!