Japan’s central bank has reaffirmed its commitment to its current ultra-loose monetary policy, in sharp contrast to recent interest rate hikes announced by central banks of some developed economies.
The U.S. Federal Reserve on Wednesday raised interest rates by 75 basis points, the fifth time this year, while Switzerland has emerged from negative interest rates by raising interest rates for the second time this year, making Japan the only major economy to maintain negative interest rates.
The Bank of Japan (BOJ) ‘s insistence on the easing policy has put the Japanese economy and financial markets under increasing pressure. The yen, which has already depreciated nearly 25 percent this year, is likely to weaken further amid expanding inflation.
Experts here believe that there are reasons behind the BOJ’s decision to keep the ultralow rate policy in the face of a wave of interest rate hikes triggered by the Fed’s aggressive move.
Analysts said that higher interest rates might dampen demand, which is not conducive to a sustained recovery. Japan’s core consumer prices in August rose 2.8 percent year-on-year, higher than 2 percent, the target set by the BOJ, for the fifth consecutive month, official data showed.
However, Haruhiko Kuroda, the BOJ’s governor, said Japan’s price rises, unlike which in the United States, are due to imported inflation, not demand-driven inflation desired by the central bank.
Wataru Suzuki, an economics professor at Gakushuin University, said price rises in Japan was mainly driven by rising international energy prices, citing that the core consumer price index excluding energy and fresh food rising just 1.6 percent in August year on year, below the 2 percent target, while corporate prices rose 9 percent in August.
Consumer prices have not risen sharply in line with corporate prices, suggesting that demand is weak, Suzuki said, stressing that the central bank needs to keep the ultralow rate policy to support demand.
Hideo Kumano, chief economist at Dai-ichi Life Research Institute, said that the current situation is far from the BOJ’s expectations that as the economy improves, wages rise, and prices will rise steadily.
According to a recent report released by the Ministry of Health, Labor and Welfare, the average wage of Japanese workers fell 1.3 percent year-on-year in July after adjusting for price changes, the fourth consecutive month of year-on-year decline in real wages, which experts believe will lead to a stagnation in consumption.
Kuroda said that against the backdrop of the Fed’s aggressive interest rate hike, small steps by the BOJ in raising interest rates will not help reverse the sharp depreciation of the yen, but may hurt Japan’s economic recovery.
Some observers say the fact that Japan’s government is heavily indebted makes it difficult for the central bank to raise interest rates now, because such a move will be supposed to weigh on the country’s fiscal health.
Finance ministry data showed that the ratio of Japan’s outstanding public debt, including local government debt, to Japan’s GDP reached 256.9 percent in 2021. Total outstanding government bonds are expected to reach 1,026 trillion yen (about 7.2 trillion U.S. dollars) by the 2022 fiscal year ending March 2023.
Kazumasa Oguro, professor of economics at Hosei University, said that a rate hike would be a huge blow to Japan’s fiscal stability, stressing that at current interest rates, the Japanese government needs to spend nearly 10 trillion yen a year just to pay interest on its bonds, and the expenditure would double if the central bank raises rates by one percentage point.
Higher interest rates will also increase the burden on businesses. Interest rate hikes will be inevitable as Japan will eventually need to normalize its monetary policy, but for now, the timing is not favorable for any rate hike, considering the weak performance of businesses in the COVID-19 pandemic, Kumano said, arguing that without proper export arrangements, the number of small and medium-sized enterprises that fail to survive in the future will increase.
Some enterprises were suffering from increasing debt, with service sector businesses being the worst hit, Kumano said, adding that it is difficult for them to pass on higher costs caused by higher interest rates through price increases.
Masakazu Tokura, head of the Japan Business Federation, said that although a sharp depreciation of the yen is bad, a careful review is needed before the central bank changes the course of the monetary policy.
The dollar appreciation caused by U.S. interest rate hikes exports not only inflation but also greenshoots of recession to the world, the Nihon Keizai Shimbun reported.
Some Japanese media and economists believe that conditions are not ripe for Japan’s central bank to raise interest rates, and a forced rate hike could derail the fragile economic recovery and even plunge it into a long-term recession.