BOJ Raises Its Interest Rate

The Bank of Japan announced that it raised its interest rate from 0.75 percent to 1.0 with 7 to 1 majority. The rate reached the highest level in these 31 years. The decision was based on their optimistic perspective for Japanese economy which is now suffering from price inflation and depreciation of Japanese yen, caused by the war in Iran. Nevertheless, foreign exchange did not show any significant surge of Japanese yen even after the policy change of BOJ. 

Monetary Policy Meeting (MPM) of the BOJ was held on June 15th and 16th with an irregular posture. BOJ Governor Kazuo Ueda was absent, because he had been hospitalized with infectious disease, not participating in the voting for the decision on interest rate. While the decision was overwhelmingly supported by the members of MPM, one member opposed to it, being afraid of exacerbation of production and employment in the future.

 

Vice-governor of BOJ, Shin-ichi Uchida, showed optimistic viewpoints on Japanese economy in his press conference after the meeting. “Risks of making economy go downward is lessened compared to the past situation,” said Uchida. The statement of BOJ raised two reasons. One is efforts of the government for various measures to reduce household burden of higher energy prices, supposedly including Sanae Takaichi administration’s subsidy for maintaining gasoline price. Another is a progress in securing alternative sources of supply for raw materials that are highly dependent on the Middle East.

 

But Uchida realizes that the price hike of raw materials has been added on the price of products in trades between companies in an unexpectedly rapid pace. “There is a risk that underlying CPI inflation will rise beyond 2 percent of price stability target,” said Uchida. Although the CPI has not reach 2 percent of rise, the BOJ insists on the importance of containing it within that target.

 

Depreciation of yen is another reason to raise the interest rate. Although the Ministry of Finance intervened in foreign exchange to prevent excessive decline of Japanese yen’s value at the end of April, the rate has later been declining again to the level of 160 yen against a dollar. Cheap yen causes further price inflation with high price of imported goods. Despite BOJ’s interest hike, the foreign exchange showed no immediate response, indicating that the policy change had no difference from what they had expected.

 

The BOJ also decided to end its reduction of monthly purchasing of Japanese government bonds (JGB) in March 2027. During ultra-easy monetary policy under the leadership of former governor Haruhiko Kuroda, the bank introduced the policy of purchasing JGB. The volume of monthly purchase once climbed up to around 6 trillion yen, and the bank began to reduce it from August 2024. The bank decided to keep on reducing by the first quarter of 2027 and settle it at monthly 2 trillion yen thereafter.

 

It is possible the bargaining between the BOJ and Takaichi administration. While the bank hopes to normalize its monetary policy by raising interest rate, Takaichi is afraid of negative impact of the interest rate hike. Ending reduction of JGB purchase may be the bank’s compromise to maintain its policy to raise its policy not only for this time but for the future.

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