Bank of Japan Raises Interest Rates
Today, the BOJ (Bank of Japan) voted by a majority of 7–1, (the one dissenting vote was board member Toichiro Asda) to raise its benchmark interest rate by 25 basis points to 1.00%, the highest interest rates have been for 31 years. Experts advise that the BOJ will continue to vote for interest rate increases every six months with the possibility of a further increase by the end of the year. The board met without Governor Kazuo Ueda, (the first time since 2010 that the board has voted without a Governor present), who is currently hospitalised with an illness.
In the absence of the Governor, Deputy Governor Shinichi Uchida chaired the meeting and in the post-meeting press conference said, “Compared with the previous meeting in April, the U.S. and Iran have signed a memorandum. That is a welcome. Having said that, there is uncertainty on the pace of improvement in distribution (of oil)”. He went on to say, “The risk of a sharp deterioration in the economy has diminished. On the other hand, prices are broadening, and there is a risk that underlying inflation may deviate from our target”.
On the pace of future rate hikes Deputy Governor Uchida said, “We will look at economic, price and financial developments, particularly with an eye on the Middle East situation, for the time being. We’ll look at whether the economy and prices are moving in line with our forecasts, as well as risks. With underlying inflation approaching 2.00%, we need to be mindful of upward price risks. We will guide policy so that we won’t fall behind the curve. The main difference between our previous meeting and this one is that downside risks to Japan’s economy have subsided significantly. Additionally, we have seen steady pass-through of costs in business-to-business prices, which led us to be more vigilant to inflation risks”.
Indeed, analysts advise that recent data shows that in May wholesale inflation* spiking to a 3-year high of 6.30% signifying that companies were passing on higher costs due to the energy shock created by the United States/Iran Israel conflict. However, they expect core consumer inflation to increase above the target inflation level of 2.00% later this year as it had originally fallen below the target level due to government subsidies aimed at curbing utility bills. The conflict in the Middle East has added complications to the policy path being pursued by the BOJ adding inflationary pressure through increasing costs of oil which hurts an economy that is heavily reliant on imported fuel and other energy derivatives.
*Wholesale Inflation – Measures the rising or falling costs of raw materials and goods in bulk before they reach the consumer.
Headline Inflation – represents the overall increase in prices for goods and services within an economy, as measured in total consumption including the volatile prices of food and energy.
Underlying or Core Inflation – Measures and tracks the long-term structural trend of consumer prices excluding volatile prices of food and energy.
The decision to raise rates is not only to tackle Japan’s inflation problems but it is also in an effort to stabilise Japan’s currency, the Yen, which has come under pressure from major currencies such as the Euro and the U.S. Dollar, with one expert commenting that there has been a sense that the Yen is too cheap and that raising the interest rate will not hurt. The Prime Minister Sanae Takaichi is renowned for boosting spending in Japan but has not been critical of the BOJ’s interest rate policy even though she has previously been dismissive of rate hikes.
