By D. Maan, Jadetimes News
The Central Bank of Japan has decided to hike interest rates amid efforts at monetary policy normalization.
Japan's central bank increased the cost of borrowing for the second time in 17 years to start reining in easy monetary policy in the world's fourth-biggest economy. The Bank of Japan raised its benchmark interest rate to "around 0.25 percent" from the previous range of 0 percent to 0.1 percent. This forms part of a broader push to unwind massive bond buying and dial back on a decade of easing.
Timing and Market Reactions
The decision by the BoJ comes just hours before the US Federal Reserve is due to announce its latest interest rate decision, with the Bank of England due to make a similar announcement on Thursday. "The rate hike was widely expected after domestic media reported the decision ahead of time on Tuesday night," said Stefan Angrick, a senior economist at Moody's Analytics. "However, the move is somewhat at odds with recent economic data and the lack of demand driven inflation."
Economic Context
Japan's economy contracted an annualized 2.9% from January through March, according to official figures. Consumer prices rose by only 2.6% last month compared with a year earlier, below expectations. "Despite lagging consumer spending, monetary officials sent a clear signal by hiking interest rates and allowing for a more gradual balance sheet reduction," said Frederic Neumann, Chief Asia Economist at HSBC. "Barring major disruptions, the BoJ is on course to tighten further, with another interest hike expected by the start of next year."
Historical Perspective
The BoJ had hiked borrowing costs for the first time since 2007 back in March, marking the end to negative interest rates globally. In 2016, the BoJ had cut its main interest rate below zero to jolt the economy out of stagnation. A few countries used negative interest rates requiring people to pay to deposit money in banks to encourage spending rather than saving.
It was in response to the pandemic that central banks around the world cut interest rates to help counter the negative impact of lockdowns and border closures. Among such places were Switzerland, Denmark, and the European Central Bank, which all implemented negative interest rates. Since then, most central banks, including the US Federal Reserve and the Bank of England, have raised interest rates to fight price surges.
Challenges and Future Outlook
"The rate hike was a necessary step toward normalizing monetary policy," said Angrick. "However, it does not sit easily with a poor run of economic data and a lack of demand driven inflation." Challenges notwithstanding, the BoJ is still committed to gradual tightening of monetary policy. "Barring major disruptions, the BoJ is on course to tighten further, with another interest hike expected by the start of next year," added Neumann.
That is, Japan's central bank has been raising interest rates and cutting back its bond buying program, the two policy steps toward the normalization of monetary policy. This adjustment is part of global trends, but it has also underlined the special problems Japan is facing in its quest for growth with control of inflation.
