Japan hikes rates into positive territory
Japan’s central bank has raised interest rates for the first time in 17 years. The Bank of Japan (BoJ) has been the last global hold-out for ultra-loose money, even as other central banks have tightened policy.
Japanese inflation is now running slightly above the 2% target, while the country’s largest union group recently agreed a “whopping” 5.28% wage rise, say Duncan Wrigley and Kelvin Lam of Pantheon Macroeconomics. At the start of this week, the BoJ responded by modestly raising rates from -0.1% to between 0% and 0.1%. That marks the end of eight years of negative interest rates.
The bank also formally ended the bank’s yield-curvecontrol policy, which saw it manipulate government bond yields with printed money. Despite the hike, the BoJ seems “in no rush to raise rates further – officials say that “accommodative financial conditions will be maintained for the time being”, barring a shock such as an oil price spike.
Easy money has seen the yen trade at two decade lows against the US dollar in the past few years, says Justin McCurry in The Guardian. That has been a boon for Japanese exporters and multinationals, helping push the Nikkei stock index to a record high. But it has also made imports dearer, putting pressure on households, which has fuelled a growing political backlash to loose money. Higher rates will make loans more expensive, a particular problem for a country whose government debt-to-GDP ratio of 260% is one of the highest in the world.
Japan’s move ends the historically “unique” post-2008 experiment of negative interest rates, says Jim Reid of Deutsche Bank. Negative rates did ease the debt burden caused by the global financial crisis, but it also fuelled asset bubbles and wasteful capital allocation that may have been a cause of low productivity.