Japan is the only G7 economy to keep negative interest rates despite inflation. Here’s why.
Of all the developed economies, Japan is the most ambiguous when it comes to monetary policies. Today, the Bank of Japan’s governor Kazuo Ueda declared a shift in their approach.
Since 2016, the Bank of Japan has linked interest rates with long-term bonds, in order to stabilize liquidity for both markets and foreign investors. The yield curve control (YCC) is the system put into place by the BOJ to control both returns.
Until today, the YCC allowed a 0.25% difference in returns for long-term bonds compared to interest rates. On Friday, Ueda decided to increase the YCC to 0.5%.
The Bank of Japan is refusing to increase interest rates, allowing inflation to slowly creep up as it passes the 2% target. At the moment, Japan’s core inflation is at 3,3%.
Japanese inflation is not nearly as high as other G7 nations. In the United States, core inflation sits at 4,87%, in the United Kingdom is at 6,9%, and in the European Union at 7,7%.
Indeed, the American Federal Reserve, the Bank of England, and the European Central Bank have all been violently raising interest rates. This week, the Fed brought interest rates to 5,5% and the ECB to 4,25%.
On the other hand, the Bank of Japan prefers keeping interest rates low at -0,1%.
The reaction of Asian markets
Following the missed interest rate increase, the Tokyo Nikkei slipped by as much as 2,4% on Friday.
Chinese markets, on the other hand, rejoiced at this decision and gained value. The Hong Kong stock exchange rallied 1,41% and Shanghai by 1.84% on Friday.
The different reactions by Asian markets signal the geopolitical rivalry between China and Japan. Compared to American stock exchanges, where stocks dropped, it shows the political stances of the two countries.
In any case, the Nikkei climbed back before the bell, closing at only -0,40%. This rebound was caused by Ueda’s reassurance that monetary easing will be relaxed and the YCC curve expanded.
Ueda declared they would "conduct yield curve control with greater flexibility, regarding the upper and lower bounds the range as references, not as rigid limits, in its market operations."
On the other hand, a complete change in monetary policy would likely be seen negatively by Japan’s political cadres. Prime Minister Fumio Kishida is at his lowest approval point, and any further decline in Japanese economic activity would worsen his already crumbling consent.
A difficult situation that makes Japan unique in its economic policy decisions. How long will it last?
