The sharp fall underscores the monetary policy importance of the decision: Japan’s central bank continues to buck the trend.
(Photo: Bloomberg)
Tokyo The Bank of Japan moved the foreign exchange market strongly on Thursday. Despite growing criticism of the ultra-loose monetary policy, the central bank’s nine-member monetary policy committee decided not to raise interest rates.
The members only raised the inflation forecast for the end of 2022 from 1.1 to 1.9 percent. Immediately after the results were released, the yen fell more than 1 percent against the dollar to 129.70 yen. It is therefore around 13 percent below the value at the beginning of March.
The sharp fall shows how important the monetary policy decision is: Japan’s central bank is continuing to buck the trend in the USA and other countries to drastically increase interest rates in the fight against inflation. Instead, it pushes those on short-dated Japanese government bonds (JGBs) into the red and caps 10-year JGB rates at 0.25 percent.
As a result, players in the FX market are betting that the Japan-US interest rate spread will continue to widen and that the yen will weaken further after its recent plunge. This, in turn, should strengthen the critics who warn that commodity prices will continue to rise as a result of an ever weaker yen.
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Japan’s trade balance has already slipped into the red because of the high cost of importing raw materials. Concerned about this trend, critics of the central bank are calling for an interest rate hike in Japan to reduce the negative impact of rising prices on domestically oriented companies and consumers.
Central bank expects no deflation
The central bank contradicted this fear on Thursday: The members of the monetary policy committee admitted that the inflation rate due to commodity prices could reach the inflation target of two percent this year, but only temporarily. “After that, we expect price increases to slow down,” the central bank said. Because the current price surge would then no longer play a statistical role.
Japan’s trade balance has turned negative.
(Photo: AP)
However, the Bank of Japan does not fear a relapse into deflation. Rather, it predicts that the core inflation rate (excluding energy and vegetable prices) will remain moderately positive after more than two decades of falling prices.
However, this prospect is no reason for monetary policymakers to act. Moderate inflation is the goal of the central bank and government in order to stimulate Japan’s economy and at the same time slowly reduce the high national debt through inflation.
Prime Minister Fumio Kishida also announced an economic stimulus program worth around 50 billion euros on Tuesday. It is expressly intended to alleviate the consequences of inflation through higher subsidies for gasoline, extended zero-interest loans for medium-sized companies and further cash payments to needy families.
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Economists have also backed the Bank of Japan’s standstill. Moody’s Analytics’ Stefan Angrick countered warnings of a weak yen by saying they overestimated the value of a rate hike and that rising commodity prices would not impact the yen that much. “Monetary policy is only part of the story,” he writes in an analysis. “Higher interest rates would do little to improve the situation significantly.”
Central bank: Income situation “relatively weak”
The reason for Angrick is the same as for the central bank: inflation is currently being driven by commodity prices, not high domestic demand. There is also no wage-price spiral yet. Although the government is pushing for strong salary increases, the central bank attests that the labor market and the income situation remain “relatively weak”.
Against this background, for economist Angrick, higher interest rates are economic poison that could slow down the already weakening domestic demand even more. His conclusion: “For the Bank of Japan to raise interest rates, it will need evidence of stronger, demand-driven price increases.”
More: Japan is taking action against the consequences of inflation with an economic stimulus package