On Tuesday, the Bank of Japan (BoJ) finally increased interest rates for the first time since 2007. This long-awaited move comes two weeks after BoJ Governor Kazuo Ueda expressed a desire to see sustained price rises before making a decision on rates.
Key Developments:
- Interest Rate Adjustment:
The BoJ set the interest rate between 0% and 0.1%, a cautious step forward after decades of deflation. Japan was the last central bank to maintain negative interest rates. - Economic Context:
- Japan remains in a technical recession, with real GDP falling by 0.1% in Q4 2023 and 0.8% in Q3 2023.
- The Japanese Yen has weakened significantly, losing a fifth of its value against the US dollar over 2022 and 2023. Despite the rate announcement, the yen continued to decline.
- Inflation Concerns:
Ueda stated that the limited increase in rates reflects inflation not yet stabilizing around the 2% target.
Wage Growth and Monetary Policy:
- Historic Wage Gains:
Workers at large Japanese firms saw their highest pay rise since 1991, signaling a potential shift in consumer spending power. - Monetary Adjustments:
- The BoJ will maintain its $40 billion monthly bond buyback program to stimulate consumption.
- It has, however, decided to end its controversial Yield Curve Control (YCC) policy, which involved purchasing bonds to suppress long-term interest rates. YCC faced criticism for market distortion.
Implications for Lending:
Japanese banks, traditionally cautious about lending, may respond to the change in the base rate by increasing lending activity, potentially boosting economic growth.