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Bank of Japan: Late to the hiking party

Aegon Asset Management investment manager Ruari van Veen discusses how Japan is late to the Central Bank rate hiking party.

 

For the first time since 2016, the Bank of Japan (BOJ) no longer maintains a negative policy rate. The bank announced during its meeting on Monday (19th March 2024) that it will raise the lower bound of its policy rate from -0.1% to 0.0%. Although the increase is marginal, it is a symbolic moment for the Japanese financial system that has undergone one of the most aggressive monetary stimulus programs for decades as a result of very low and often negative inflation.

 

The BOJ also scrapped its yield curve control and exchange-traded fund purchase program, as it attempts to grapple with an elevated inflation level for the first time since the 1980’s. However, concerns remain within the BOJ that inflation will eventually drop below its target of 2%, ensuring that any significant monetary restriction remains off the table. As a result, the BOJ continues to tread a difficult monetary path between greater or entrenched inflation and a return to negative inflation.

 

The change in monetary policy was widely anticipated by the market and was discussed at previous BOJ meetings. However, the lack of any forward guidance on future interest rate hikes and the limited increase in policy rates underwhelmed the market and as a result the Japanese Yen depreciated to a 30-year low of 150 JPY per USD. Yields on Japanese government bonds remained relatively unchanged with 10-year yield dropping three basis points to 0.73%.

 

Given that recent wage negotiations between labour unions and employers in Japan have resulted in significant increases in salaries and thereby driving up labor costs, the market expects further restrictive action will be taken by the BOJ in 2024. This risk of a higher wages feeding into higher inflation was also emphasized during the BOJ meeting.

 

The restriction of monetary policy by the BOJ at this point in time may seem unusual, given that almost all other central banks around the world have stopped hiking interest rates and are instead looking for the appropriate moment in time to ease monetary policy now that inflation is starting to come down. It highlights the differences between the Japanese economy and culture as compared to the rest of the world. Most other central banks have taken significant action to lower inflation, while the BOJ has tried to use it to get out of a deflationary recession that has plagued the Japanese economy for years.

-Ends-

 

Notes for the editor

 

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Exp: 20 March, 2025

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