Uncertainty Around Japan Inflation Underscores Need for Nimble Monetary Policy
IMFMay 24, 2023
Japan Raises Interest Rates for First Time Since 2007
The Facts
For the first time in 17 years, Japan's central bank, the Bank of Japan (BOJ), raised interest rates. The bank's short-term rate will jump from -0.1% to between zero and 0.1%.
Japan also announced an end to its negative interest rate policy, which featured depositors paying to put their money in banks and borrowers receiving cheap loans and was started in 2016 to boost borrowing in the face of an idle economy.
The Spin
Narrative A
After Japan endured debilitating deflation for over three decades, its economy is now dealing with rapid inflation that could have equally unsettling effects. Negative interest rates, which continued past the pandemic and into the post-pandemic inflationary surge, could combine with historic wage increases to put the country on track to fall into a devastatingly volatile economy if its monetary policy isn't fixed.
Narrative B
Raising interest rates will help the largest financial institutions, who wished for this policy change so they could up-charge their customers to increase profits. But small business loan providers who rely on bottom-level rates their customers can afford won't benefit from this. Under the previous system, smaller banks had more cash to invest in long-term bonds, an advantage that will end once interest rates surpass those bonds' yields.