Japan has officially entered a new monetary age. The Bank of Japan has recently increased its benchmark interest rate from 0.50% to 0.75%, which is its highest point since 1995. The figure may not seem impressive compared to other countries, but its implications cannot be overlooked. For example, this is the end of Japan’s four decades of experimenting with extremely low interest rates.
Japan's economy is currently in a state where it is mildly recovering, but with certain weaknesses, as described by Japan's Governor Kazuo Ueda. According to Ueda, the latest rate increase is designed in such a way that it is not aiming to shock the market but rather reflecting the improved conditions in the economy with a gradual approach toward price stability. Notably, the central bank is no longer committed to being near zero, as emphasized by Ueda.
The issue is very much linked to wage growth. Wage growth is now entering into prices, which is something that has been a problem for Japan for the last several decades. If this keeps up, the Bank of Japan is seeing opportunities to continue to raise interest rates, but that is dependent on the current level of 0.75 percent.
The need for caution was highlighted by Ueda as well. Talking about the actions that will be made by the central bank in the future, it was said that "the previous policy changes have not had a strong tightening effect." Indeed, a slow start is what markets are looking for.
Japan is incrementally, but surely, abandoning the kind of economic policies that have characterized the country for the past generation.
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