In its last 2023 meeting, the Bank of Japan maintained interest rates negative. Here’s why.
Japanese interest rates remain in negative territories as the Bank of Japan wraps up its final meeting of the year. Japan keeps its position as a monetary outsider compared to its other G7 peers.
The BoJ decided to keep interest rates negative following the dovish turn by the American Federal Reserve. Chairman Jerome Powell pointed at three rate cuts to likely come in 2024. This sent the S&P 500 and other markets on a rally, also fueled by the Christmas season.
By postponing its decision to hike interest rates, the BoJ wants to placate market reactions.
“If we look at the movement in dollar-yen, which really is the clearest place where this would manifest itself,” said Mehvish Ayub, senior investment strategist at State Street Global Advisors, “it was already on a bit of a path in terms of downwards dollar and a higher Japanese yen. They would’ve added a lot of fuel to the fire had they actually indicated a change in policy.”
Japan has kept interest rates negative throughout the latest years of high inflation in the West. The Federal Reserve brought rates to a 20-year high of 5.5%, while the European Central Bank raised them to a record 4%. For all this time, however, Japanese rates remained at -0.1%.
The reason for low rates
Albeit lower than in other advanced economies, Japanese inflation worries economists and experts around the globe. From a high of 4.3% in January 2023, inflation in Japan dropped to 3.3% in October.
However, inflation in Japan was also subject to a lot of fluctuation, dropping as low as 3% in September and subsequently rising. Although it appears to be nothing compared to the inflation rates in Europe and the US in 2022, there is still a lot of uncertainty around it.
Indeed, inflation in the US and Europe is dropping steadily, but the same cannot be said for Japan.
But there are very good reasons for the BoJ to keep interest rates low. The Japanese economy has stagnated for the last 15 years, with little to no prospects of growth. Japan’s stagnation was so appalling that China managed to surpass its nominal GDP.
High inflation and low rates are attempting to reverse this trend.
Unfortunately for Japan, this strategy seems to not be working. GDP contracted more than expected in Q3, dropping by 2.9%. Japanese Prime Minister Fumio Kushida is at historically low levels of popularity, and a worsening economic situation will fuel national discontent.
