Central Bank of Japan: Bank of Japan eases monetary policy

Status: 06/17/2022 08:56

In contrast to the global trend, the Bank of Japan did not raise interest rates despite inflation and the decline in the currency. Why is the central bank of one of the world’s largest economies sending such a signal?

The Japanese central bank is bucking the global tightening trend, keeping the reins extremely slack despite rising inflation and a steep decline in the yen. While other central banks have recently raised their key interest rates or at least announced a turnaround in interest rates, the Bank of Japan (BoJ) decided today, after a two-day meeting, to leave its rates unchanged. important levers of monetary policy.

Short-term interest rates must remain at minus 0.1 percent and long-term interest rates around zero. The BoJ also abides by its purchases of government bonds and stocks. Thus, Japanese currency observers continue to follow the opposite path to that of European and US central banks.

Yen at its lowest level since 1998

Following the BoJ’s decision, the yen continued to depreciate rapidly against the dollar, before recovering. However, trading on the foreign exchange market continued to be volatile. The Japanese currency fell to a 24-year low against the dollar this week. The yen has fallen nearly 15 percent since the start of the year.

The weakness of the yen is raising concerns in the markets that the BoJ’s continued low interest rates will exacerbate inflation and harm the economy. According to economic theory, higher interest rates limit the rise in prices. For one thing, the currency is becoming more attractive to investors, which increases its rate and can make commodity and energy imports cheaper. On the other hand, they lead to more expensive loans, which dampen consumption, investment and therefore demand.

Low interest rates should boost the economy

However, the Japanese central bank’s decision to stick to its easing line of monetary policy was expected. Although prices are also rising in Japan, inflation is mainly driven by high energy prices, whose higher interest rates can do little to change. Given the still relatively low price pressure in Japan, there were fewer reasons for the central bank to raise interest rates, according to Maybank analysts, for example.

BoJ Governor Haruhiko Kuroda had already indicated that, despite the dramatic weakening of the yen, monetary policy should not be tightened for the time being. The Bank of Japan keeps interest rates low to stimulate the sluggish economy. Favorable interest rates lead to more loans, the more money is spent and consumed.

Other central banks are tightening interest rates

By contrast, in the United States and Europe, the fight against inflation, which feeds fears of a recession, appears to take precedence over economic growth. In the middle of the week, the US Federal Reserve raised its benchmark interest rate by 75 basis points, risking the largest rate hike since 1994.

Yesterday the Bank of England (BoE) and the Swiss National Bank (SNB) followed suit with rate hikes. The SNB raised the benchmark rate by 0.50 points. Hardly any economist had expected this. The tightening of monetary policy aims to prevent inflation in Switzerland from spreading more to goods and services. The central bank also underlined its intention to continue intervening in the foreign exchange market if necessary.

This is putting increasing pressure on the European Central Bank (ECB), which has been rather hesitant to date. It signaled a first small rate hike of 0.25 points for July. The Bank of England raised interest rates by an additional 0.25 points, as widely expected.

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