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Why Japan Is Virtually the Only Country to Maintain Its Interest Rates at an All-Time Low

BusinessWhy Japan Is Virtually the Only Country to Maintain Its Interest Rates at an All-Time Low

As the Federal Reserve regularly raised interest rates in the United States in a bid to manage raging inflation, practically every major central bank in the globe has tried to keep up. There is also the Bank of Japan.

The yen is falling rapidly. By some metrics, inflation is at its highest level in decades. According to popular opinion, a rate rise might alleviate both issues. However, the Bank of Japan, which has never been one to follow the herd, has stayed resolutely committed to its ultralow interest rates, believing that raising them now will simply stifle demand, which is already weak, and impede the delicate economic recovery from the epidemic.

This week, Prime Minister Fumio Kishida expressed strong support for the Bank of Japan’s monetary policy, despite the yen falling to a 32-year low against the dollar. The yen’s decline has contributed to price increases in a country not accustomed to them and increased the pressure on his unpopular administration.

The day before to his support, the governor of the Bank of Japan, Haruhiko Kuroda, made it plain in statements to the Japanese parliament that the bank would not soon reverse direction. Mr. Kuroda said that all members of the bank’s policy board agree that “given the present economic circumstances, it is prudent to maintain monetary easing.”

His justification is straightforward. Japan desires inflation resulting from robust consumer demand. Inflation has worsened, however, due to a strong dollar and supply shortages caused by the epidemic and the conflict in Ukraine; hence, the bank should maintain its current path.

Divergent economic conditions in the United States and Japan have resulted in starkly divergent monetary policies, a disparity that has contributed to the depreciation of the yen as investors seek higher profits overseas.

In the United States, where the economic recovery has been swift and salaries are growing rapidly, the Federal Reserve is attempting to curb inflation by stifling demand. Some famous economists have cautioned that going too far might be detrimental to the economy, but the government thinks it can accomplish its objective in part by discouraging spending with higher interest rates.

In Japan, however, there is widespread consensus that, at least for the time being, a rate hike would be more detrimental than beneficial. The economy of Japan, the third biggest in the world, has hardly regained to its pre-pandemic levels, and salaries have stalled despite a labour market so tight that unemployment stayed below 3 percent throughout the pandemic’s deadliest months.

Stefan Angrick, a senior economist at Moody’s Analytics in Japan, said, “To reduce inflation in Japan, it would be necessary to substantially restrict demand, which is difficult given that demand was already very weak compared to other countries.”

In the United States, inflationary pressures have been widespread, but in Japan, they have predominantly affected basics like as food and energy, whose demand is generally met by imports.

Japan’s inflation rate (excluding volatile fresh food prices) has surpassed 3 percent, the highest level since 1991, excepting a temporary surge caused by a 2014 tax rise. However, excluding food and energy, Japanese prices in September were just 1.8% higher than the previous year. In the United States, this percentage was 6.6%.

Diverse and poorly understood factors account for Japan’s low population. Experts have discovered reasons in stagnating wages and the negative consequences of an ageing and declining population on demand.

However, perhaps the greatest contributor is a populace used to steady pricing. Over the last year, producer prices — a gauge of inflation for firms’ products and services — have increased by almost 10 percent. In contrast to their American counterparts, Japanese corporations have been unwilling to pass on these higher expenses to customers.

This indicates that a significant portion of the present inflationary pressure is from the strong currency and supply concerns impacting imports – external variables that are beyond the Bank of Japan’s control. Under these conditions, bank officials “know well well that raising interest rates would not alleviate price pressures; it will just increase company expenses,” according to Bill Mitchell, an economics professor at the University of Newcastle in Australia.

The Bank of Japan adopted its current monetary easing strategy in 2013, when the country’s then-prime minister, Shinzo Abe, committed to take aggressive steps to promote economic development that had stalled for decades.

The strategy included unleashing a deluge of government expenditure and altering the economic structure of Japan via programmes such as encouraging more women to enter the workforce.

But the most essential factor was making money cheap and easily accessible, which the Bank of Japan accomplished by slashing interest rates to zero and buying up bonds and stocks. Mr. Kuroda guaranteed that these measures would be maintained until inflation, which had been almost nonexistent, hit 2 percent, a level experts said was required to increase salaries and boost the country’s sluggish economy.

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