BOJ: Monetary Policy Becoming More Difficult to Steer

Editorial

15:00 JST, November 3, 2024

With the ruling parties having lost their majority in the House of Representatives as the result of the lower house election, the foundations of Prime Minister Shigeru Ishiba’s administration have become unstable. The Bank of Japan is also likely to find it more difficult to steer its monetary policy.

At its Monetary Policy Meeting, the central bank decided to maintain the policy interest rate at around 0.25%. The BOJ has now left the policy rate unchanged at two consecutive meetings, following its decision to raise the policy interest rate in July.

The ruling parties suffered a crushing defeat in the lower house election, and the future of economic policy management has become uncertain. The Democratic Party for the People, with which the ruling parties are seeking a “partial coalition,” advocates for aggressive fiscal policy and monetary easing measures, and the DPFP is thought to be cautious about normalizing the monetary policy of raising interest rates.

The outcome of the U.S. presidential election, which is due to be held on Tuesday, will also have a major impact on the Japanese and U.S. economies. It was these circumstances that likely made BOJ Gov. Kazuo Ueda decide not to further raise the interest rate.

Speaking about the central bank’s monetary policy, Ueda reiterated at a press conference that the BOJ will “raise the policy rate and adjust the degree of monetary easing” if the economic recovery continues as expected.

Ueda had previously said there was “time to spare” before any further interest rate hikes, but he emphasized that he will no longer use this expression, as the possibility of a U.S. recession and other risk factors have lessened.

The Japanese economy is at a point where it should be transitioning to a growth-oriented economy with increases in wages and investment. It is important to keep working to normalize monetary policy to achieve a vibrant Japanese economy.

However, real wages, which reflect price fluctuations, have been on a long decline since the spring of 2022 and are still not seeing stable growth.

Due to concerns about the future and other factors, households are strongly inclined to save money, and consumption also lacks strength. The BOJ should carefully judge the timing of policy change.

One concern is the growing trend of the yen weakening and the dollar strengthening in the foreign exchange market.

In mid-September, the yen briefly strengthened to the ¥139 range against the dollar, but it is now above ¥150 to the dollar. A weak yen will push up prices of goods through higher import prices, placing a burden on household finances. It is important for the central bank to pay sufficient attention to the foreign exchange market as well.

Regarding the BOJ’s monetary policy, there has been a series of wild fluctuations in financial markets as speculation has swirled around interest rate hikes due to politicians’ comments.

After Ishiba met with Ueda on Oct. 2, the prime minister said that he personally did not think the environment was such that interest rates should be raised, and the comment led to the yen weakening and stock prices rising rapidly.

The government and the BOJ should promote close communication. But, specific steps, such as the timing of interest rate hikes, should be left to the BOJ’s judgment.

(From The Yomiuri Shimbun, Nov. 3, 2024)