Bank of Japan lifts rate to 17-yr high of 0.5% with wage hike expectations
Commentary:
Whenever a central bank increases the key rate it also knows there are side affects like taking medicine which could have some side affects, and in this case might cause the economy to slow down some.
The two areas, as mentioned, that could be affected are consumer spending, consumption, and business investments as consumers don't want to pay for the key rate increase which comes with higher interest costs and also businesses don't want to pay for higher interest rates on loans from banks.
But an increase to 0.5 percent might not be that much of an increase to affects both areas, as maybe consumers and businesses might not even feel the affects of the rate increase.
Its important for central banks to monitor how the rate increase might affect consumer spending and business investments to see if there decreases in both areas due to consumers not liking the rate increase and businesses not liking the increase on loans.
If the rate increase is positive and or doesn't cause any side affects that might be a sign for the BOJ to consider another rate hike in March or April.
Central banks often use rate hikes to try and decrease inflation but at the same time there side affects that can cause some real and significant challenges for an economy such as lower consumer spending and of course many businesses not borrowing money from banks due to the higher interest rate.
Projects while needed and important are for the most part just guesses as to what might happen in the future, sometimes projections are accurate and sometimes they are not so accurate due to many different scenarios taking place in an economy.
The increase in rice prices might be something that is not completely understood and this time, there are many factors still not sure about such st the growing season, the hot weather, the distribution system and the prices farmers want to get to stay profitable.
Rice in Japan is a cultural topic and there are large tariffs on foreign rice in Japan which makes it hard for foreign distributors of rice to break into the Japanese market.
And there is some bias among Japanese consumers related to their preference for Japanese rice compared to rice from Taiwan, Thailand, or even China or any other foreign rice that is sold in Japan.
Usually not all central bank members agree but it doesn't take all to pass whatever they are trying to pass.
Yes, maybe the period of the zero interest rates in Japan is finished and now the BOJ is going to act like other central banks and use the key interest rate to manage the economy again.
Corporate earnings are important and a key indicator of what is going on in the economy related to businesses in Japan, and especially the large companies in Japan.
Wage increases in Japan are just beginning to as for many years companies refrained from giving wage hikes or they were very small compared to now.
But the Japanese government and the BOJ has both suggested wage hikes are very important to combat inflation and getting Japanese households to spend again despite the constant increase in inflation in Japan.
The challenge is going to be what are the small and midsize companies going to do compared to the large Japanese companies which are suggesting they are going to increase wages more than 5 percent in April.
The Japanese workforce don't all work for large companies as it been suggested that maybe 70 percent of the workforce works for small and midsize companies which can't match the wage hikes of large Japanese companies.
The current US administration has lot of plans but can they actually do what they want to do and some are popular and some are not so popular.
At the moment Mexico, Canada, and China are not so happy with what the US is going to do with the tariff situation, so its a day to day situation sometimes with the current US administration.
Financial markets react to everything that happens and sometimes the agree with increases in the markets and sometimes they disagree with decreases in the markets.
Yes, the US economy remains robust, as it's still the envy of the world, but things can always change related to new US policies and tariffs and so on.
And again, the financial markets are usually very quick to respond to what they like or don't like related to anything the US government does with new policies.
It's not a surprise that Japan's core consumer prices increased by government subsidies for utility bills decreased, and of course Japanese households are going to be unhappy about the Japanese government ending the subsidies.
All central banks, globally, want to see inflation around 2 percent as they feel it's a manageable level. Too high and an economy might considered out of control or overheating and below 1 percent and an economy might be stagnating with not a lot consumer spending in the economy and or not a lot money moving through the economy.
But since the pandemic Japan's inflation rate has remained above or even well above the 2 percent level which has caused Japanese consumers to decrease their spending which might have stunted Japan's economic growth.
And again, like most central banks the BOJ hopes if they increase they key rate it will have an affect on inflation and inflation will begin to decrease and get the the 2 percent or just lower than that in the future.
Yes, it seems to weak Japanese yen, is a major priority for the Bank of Japan as the variance between the US rate and the Japanese rate, as played havoc on the Japanese yen which makes it very weak and causes import prices to increase even more.
Japan is a resource poor country which means it has to import much of what it needs and the weak Japanese yen causes import prices to be even higher than normal which affects all Japanese households, which might cause some or many to decrease their consumer spending in the Japanese economy.
And again, the increase in the key rate has some side effects such as less consumer spending and less borrowing by companies related to business loans at banks.
When the banks increase loan interest rates, businesses decrease their borrowing and Japanese households might reduce their credit card spending as the rates on credit cards go up too, and or households don't take out loans needed for house repairs, car repairs, of even buying and new car.
The Japanese yen is weak but is both a positive and a negative for Japan. Its a negative related to import prices but its a positive for Japanese exporters and foreign tourists and tourists have more purchasing power in Japan.
It's also a positive for any businesses such as hotels, restaurants, tourist areas that cater to foreign tourists in Japan.
And finally, again, its seem the era of ultra-easy monetary policy is over in Japan as the BOJ is hinting its going to continue to increase rates as needed to help the Japanese economy.
It seems the BOJ is hinting that rate hike are going to happen in the future and maybe they are giving a signal to the financial markets about what to expect so that there are no surprises like what happened last July when the markets were caught off-guard.
Finally the Japanese economy has seen a lot of ups and downs recently and if the Japanese economy turns sour or if the wage increases are not what the BOJ wants to see there might not be a rate increases again this year.
Have a nice day!
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