Bank of Japan ups interest rate first time in 17 years

When most of the central banks in the world have been raising interest rates, or refusing to bring them down, because of spiralling inflation and uncertain growth, Japan’s central bank, Bank of Japan, raised its negative interest rate, which it had stuck to for many years in the hope of fuelling inflation, and spur economic growth in the world’s fourth largest economy. BOJ raised the rate from -0.1 per cent to 0.1 per cent. BoJ Governor Kazuo Ueda said there would be no rapid hikes in the interest rates because he still feels that Japan’s economic situation is still fragile. Japan has been facing deflationary situation where consumption fell and investments virtually stopped. It lasted more than a decade. Japan’s economic malaise of lack of growth goes back to the 1990s. The economy entered a stage of stagnation and it would not break out of it. Japan’s central bank had to resort to the extraordinary ploy of keeping the interest rate at zero and then move the rate into negative territory in the hope of encouraging credit outflow, investment and consumption. None of these things happened. It is only in the last one year that there has been some stirring in the economic life. The unions of workers had managed to clinch a deal which involved salary hikes of 3.7 per cent in base pay. This was seen as one of the signals for the BoJ to move its interest rate from the negative to the positive, though it is still much too low. According to Ueda, the aim is to achieve the target of two per cent inflation. The inflation rate has been two per cent for over a year now, and that is what helped the BOJ to make its decision of raising the interest rate. Commenting on the hike, Rob Carnell, head of Asia Pacific Research at ING, said, “The BOJ has taken a bit of a punt today on the expectation that the very substantial wage increases in a great number of firms is actually going to deliver household spending growth.”

In his press conference after the BOJ’s decision to hike the interest rate from negative to positive territory, Ueda said that “outcome of spring wage negotiations was a big factor” in the bank’s decision. He has also said that the “pace of further rate hike depends on economy, price outlooks.” Frederic Neumann, chief Asia economist at HSBC, Hong Kong said, “The BOJ took its first tentative step towards policy normalization. The elimination of negative interest rates in particular signals BOJ’s confidence that Japan has emerged from the grip of deflation.” Japanese economy has been running much too cautiously because it grew quite strongly without facing the problems of inflation for long. But growth had stopped and it looked like the economy had reached a plateau, and it could grow no further.

Moving the interest down, to zero and below zero, has been a desperate attempt by the central bank to spur growth. But it had not happened. The increase in wages has been the first sign that the stakeholders felt that something needs to be done to push the economy into the spending mode. Like most successful Asian economies, Japan’s growth has been based on exports. Domestic consumption was kept low. But when exports flagged, the economy nosedived. Japan has to fall the normal market pattern of more wages, more consumption coupled with investment and increased manufacture. The austerity mode of Asian living does not go with the capitalist mode of the economy. Japan would need to have a spending spree at home, and there is need for a respectable inflation rate.