Interest Hike with Firm Confidence on Economy

The Bank of Japan (BOJ) took another step forward to get rid of ultra-easy monetary policy. The bank announced further rate hike and reduction of purchasing Japanese government bonds (JGBs) with concern of depreciation of Japanese yen and confidence on stable increase of consumption price and wage. Receiving message of further interest rate hike possibly within this year, the foreign exchange showed steep rise of the value of yen right after the announcement of JOB.

The BOJ policy board, with majority of votes in monetary policy meeting (MPM), decided to encourage the uncollateralized overnight call rate, or short-term policy rate, to maintain at around 0.25%. When the bank terminated its negative interest rate policy in March, it raised the policy rate from minus 0.1 percent to 0-0.1 percent. While it maintained the rate for two consecutive meetings in April and June, the bank stepped up to tighter rate with deliberation on the situation of economy.

 

The BOJ also decided to reduce its purchase of JGBs from monthly 6 trillion yen to 3 trillion yen by the first quarter of 2026, the policy which had been announced at the last MPM in June. It plans to cut the amount down by about 400 billion yen each quarter. During the ultra-easy monetary policy, the bank kept on purchasing JGBs and the amount of possession went up to 580 trillion yen, occupying over the half of total balance. The JOB is gradually reducing its possession.

 

The main reason is depreciation of Japanese yen. Even after the decision of ending negative interest rate policy, Japanese yen kept on losing its value against U.S. dollar as low as 160 yen for one dollar. As the gap of interest rate kept wide between Japan and U.S., yen has been in a trend of being sold. Cheap yen causes price hike of imported goods in Japan, leading to inflation of consumer’s price. Although JOB is not directly responsible for foreign exchange, the price hike could not be ignorable for the bank.

 

Another reason of monetary tightening is stable rise of wages. The labor market achieved 5 percent wage hike in average through the wage negotiation this spring, which was at the highest level in these 33 years. The minimum wage is likely to increase by 50 yen an hour, which marks unprecedented rise. The JOB Governor, Kazuo Ueda, told that he could anticipate further rise of wage for next few months.

With recognition that the target of stable inflation of 2 percent can be achieved, Ueda even indicated further interest rate hike within this year, expectedly to the level of 0.5 percent.

 

The market immediately responded to the policy of JOB. The Tokyo foreign exchange marked steep rise of Japanese yen, from 154 yen on the previous day to 149 yen right after the MPM. Mitsubishi UFJ Bank announced that it would raise its short-term prime rate from annual 1.475 percent to 1.625 percent. The interest rate of ordinary deposit is rising five times, from annual 0.02 percent to 0.1 percent. Other major banks are supposed to follow Mitsubishi.

 

The rise of short-term prime rate directly affects housing loan. It is likely that buyers of new house will consider whether the interest rate of the loan is affordable. Each business will have to keep in mind of higher cost for business loans from the bank. Accompanying with higher interest rate of JGBs, the government needs to pay more for the redemption. It is possible that higher interest rate will be a restriction for the government to deliver bold economic policy. The JOB is going to be vigilant to the situation of economy.

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