BOJ Rate Increase: Updated Jan. 6, 2025.

Bank of Japan lifts policy rate to 30-yr high of 0.75% amid persisting inflation

Article source:   https://mainichi.jp/english/articles/20251219/p2g/00m/0bu/018000c

Ideas

The Bank of Japan wouldn't increase the rate unless it was confident that there won't be too many side effects to the Japanese economy. And at the same time trying to get the key rate closer to the level of the rate of other advanced economies.

Most economies when inflation is consistent will use the strategy of increasing the key rate as a higher rate is motivation not to take out business loans, consumer loans and using credit cards.

The BOJ is hoping that wage growth can help with the improvement of the economy and spur some kind of economic growth while the higher key rate might actually reduce some spending in the economy.

The Bank of Japan tries to ensure, with its communication, that whatever it says and does doesn't cause harm or upset both the domestic financial and global markets.

At the same time, it seems, as usual, with most central banks, it has kept some sense of the unknown what its going to do next as it wants to give itself room to change and maneuver as needed in the future.

The Bank of Japan, for the most part, is still has a dovish stance but it also gives itself room to make changes including increasing the key rate as needed to combat inflation of help the Japanese economy improve.

The Bank of Japan is in a difficult situation as it knows increasing the key rate can cause the bond yield to increase and at the same time might cause the Japanese yen to become weaker but its like a doctor prescribing a pill or medicine knowing full well there are going to be some side effects., but ultimately the potential for improvement is what the BOJ is looking for.

Japan is a resource-poor country and has to import much of what it needs, as as result a weak Japanese yen increases the price of imports, which are then passed-on in the supply chain including the final retail customer.

Again, the BOJ wouldn't increase the key rate if it felt that there is the possibility that it can help reduce inflation and help improve the Japanese economy.

But at the same time, its not a 100 percent guarantee that the rate increase will do what it supposed to do, as for example other advanced economies have increased the rate and its not a 100 percent full-proof remedy to reduce inflation and or improve an economy.

And yes, wage growth or companies increasing wages is not a full-proof strategy to help the economy, as to be understood, only about 30 percent of Japanese workers work for the large name-brand Japanese companies and the wage increase mainly goes to large company workers and the small and medium size company worker, which make up the other 70 percent of the Japanese workforce, usually get smaller wage increases which may or may not be more that what the inflation rate is in the economy.

There was always a goal or strategy for the lower borrowing costs, as the BOJ felt the Japanese economy at the time, was never really strong enough to handle a rate increase and that there would be too many side effects to the Japanese economy, so the reason for the low key rate for almost a decade. Was it the right decision at the time is difficult to say and running experiments on a an economy to see what would work and not work is not the same a running an experiment in a science laboratory, as all economists have to go on is observation related to what they do as see.

Deciding what it the real reason for inflation whether its cost-push factor or other factors is not easy to determine and the BOJ might be right or it might off a little as inflation could actually be above the 2 presence level. 

Most central banks want inflation to be around 2 percent, not much more, as they feel it's a manageable level where money is flowing through the economy at a good rate, not too fast and not too fast. 

Any slower they feel the economy is moving too slow and money or transactions are not enough and moving too fast or spending has become too much they might feel an economy is becoming over-heated.

Financial markets, both domestic and global watch what the BOJ is going to do almost everyday including what they say as what they say is usually clues to what might happen in the future.

As a result most central banks are very cautious or are very reserved with their communication  to public as they don't want to say or signal anything that can harm to markets or cause a 24 hour global move in the financial markets.

And again, to eliminate as many side effects as possible the BOJ or most central banks will not increase the rate anymore than is necessary as even a slight increase can have significant effects on an economy. So, if using the key rate and keeping it in its neutral zone is the best strategy that is what central banks will do.

And again, the BOJ is on purpose not saying where the neutral levels are as it wants to keep its options open and at the same there is always a level of uncertainty to where the real neutral level is or where is should be.

And yes, in theory, a rate hike potentially is supposed to cause borrowing to be more expensive, supposed to reduce spending, and supposed to reduce investment but at what level of each going to be reduced is always the key question and how long its going to take to reduce inflation or stabilize prices is again the key question, as at times is very hard to answer, as the BOJ or any central bank is dealing with human behavior and humans at times can be very unpredictable.

The current Prime Minister of Japan is a supposed fiscal dove which means she favors economic growth through government spending and even including keeping the key rate low.

But in this case, it seems she might be in favor of increasing the rate as a way way to help the Japanese economy as inflation as been continuous almost since the pandemic started and hasn't gone away just yet.

And of course a rate increase could cool the Japanese economy but again its seems to Prime Minister is willing to give the BOJ a chance with rate increase and see if it can reduce inflation and improve the economy.

Yes, for a very long time, while other central banks including the EU central bank and the US Federal Reserve were increasing the key rate many times since the pandemic the Bank of Japan kept its key rate almost at zero, as again it suggested the Japanese economy was just too weak to handle a rate increase and there were just too many potential side effects.

And yes Japan's fiscal health is always an issue whenever the Japanese government needs to increase spending to help the Japanese economy.

But the problem is the powers to be in Japan have used government spending for so long that it seems it feels there is no other way to help but to spend its way out of trouble.

Th problem is the powers to be in Japan know that its fiscal health is not the best and it has the highest debt to GDP ratio among advanced economies but feels it has to prioritize helping Japanese families and Japanese businesses over improving it fiscal health.

Have a nice day!