The Bank of Japan (BOJ) recently made headlines by implementing its first interest rate hike in 17 years. This move marks a significant step for the BOJ, as it lifts the country out of negative interest rates. Alongside the rate hike, the BOJ also announced the termination of asset purchases of exchange-traded funds (ETFs) and real estate investment trusts (REITs). However, the central bank may still intervene in long-term interest rates to prevent rapid increases.
Kazuo Ueda, who became BOJ governor a year ago, was widely expected to take these actions. Recent developments in the global economy, such as the reawakening of inflation caused by the COVID-19 pandemic and the fall of the yen due to aggressive actions by the U.S. Federal Reserve, have facilitated these changes.
Corporate Japan has also responded to the government’s call for higher wages and salary hikes. Workers have been granted their requests for two consecutive springs, with this spring’s average wage hike of 5.2 percent being the highest since the 1990s. However, despite wage hikes, inflation has outpaced wage growth, leading to negative real wage hikes. This has caused dissatisfaction among voters against the ruling Liberal Democratic Party.
While large corporations have been able to meet wage increase demands, small and medium enterprises (SMEs) have struggled due to thin profit margins and weak balance sheets. However, signs indicate that SMEs are now following suit and increasing wages in order to recruit and retain talent amidst labor shortages.
The end of the era of negative interest rates is seen as a necessary step in restructuring the economy. Higher interest rates will weed out weak companies that have been kept alive by extremely low rates. This will contribute to greater productivity in the overall economy.
However, there are concerns about whether the BOJ can effectively implement these changes. Aggressive tightening is politically prohibitive due to the pain it causes. The BOJ has made missteps in the past, and there is skepticism about how high the bank can go with interest rates. The speed gap between the Japanese and U.S. economies presents challenges for the BOJ, as it always lags behind the Federal Reserve’s actions.
Looking ahead, it remains to be seen if the BOJ can successfully deliver a series of rate hikes for normalization. Even if the U.S. economy experiences a soft landing, the BOJ may back off from higher rates in response to signs of a cooling U.S. economy and a relatively dovish Federal Reserve.
Overall, the BOJ’s recent interest rate hike marks an important milestone for the central bank and the Japanese economy. It signals a move away from negative interest rates and sets the stage for potential economic restructuring. However, challenges remain, and the ability of the BOJ to navigate these obstacles will determine the success of its monetary policy normalization efforts.
