Even if Japan’s inflation is growing, the BoJ maintained negative interest rates. Here’s why.
The Bank of Japan maintains a dovish attitude, keeping negative interest rates and encouraging growth. The BoJ meeting on Friday was the latest central bank assessment this week after the Federal Reserve and the Bank of England both paused rate hikes.
Interest rates in Japan remain at -0.1%, by far the further outsider in the G7 group. Every other developed economy raised interest rates to battle high inflation. As a result, the Eurozone fell into recession and the United States adopted a “higher for longer” strategy that will hamper economic growth.
Luckily for Japan, inflation never reached the same levels as Europe or the United States. Although it steadily remained higher than the 2% target, it was deemed controllable by the BoJ.
In August, Japan’s core inflation reached 3.1% year-on-year, far lower than headline consumer prices at 4.3%. This points to higher prices in volatile goods like energy and food, with core sectors like shelter still largely under control.
Nevertheless, markets are uncertain about the BoJ dovish approach. Inflation is still higher than in the United States, and oil prices could slip out of resource-poor Japan’s control.
But Governor Kazuo Ueda brushed aside these doubts. "We have yet to foresee inflation stably and sustainably achieve our price target,” he said. “That’s why we must patiently maintain ultra-loose monetary policy.”
Striving for growth
Japan is the world’s third-largest economy in GDP terms, and the fourth in Purchasing Power Parity (PPP). It is by far the second most important economic power in the G7 after the United States.
However, although very slowly, Japan’s economic dominance is slowly fading away. At the turn of the XXI century, Japan was the world’s second-largest economy, soon replaced by China.
Today, China’s economy is almost four times larger than Japan’s, whose stagnation seems unstoppable.
For this reason, Governor Ueda needs inflation to encourage growth, even if it drives prices up. Japan suffered over a decade of deflation, and a similar fate seems to be shaping in China.
Ueda wants to take this opportunity, and also make sure that wages go along with inflation to fuel growth. “We need to confirm that a positive wage-inflation cycle has kicked off," Ueda said, "this is where we still need time."
Instead of raising interest rates, the BoJ increased the so-called Yield Curve Control, boosting returns on 10-year bonds. That is the most hawkish position the BoJ will take for now, even if inflation continues to grow.
