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The difference in the direction of monetary policy between Japan and the United States has become even clearer. The Bank of Japan should carefully explain its aim of continuing monetary easing and be more vigilant about movement in the foreign exchange rate.
The U.S. Federal Reserve Board on Wednesday raised its key policy rate by 0.75 points to guide it to between 1.5% and 1.75%. The increase is three times the normal level and the largest hike in about 27½ years.
When the Fed decided to lift the rate by 0.5 points in May, Fed Chairman Jerome Powell indicated that the U.S. central bank would raise the rate by the same amount in June. However, the rate of increase in the U.S. consumer price index expanded further in May.
At a press conference, Powell stressed the need to respond with strong interest rate hikes to limit inflation.
Excessively high prices make life difficult for people on low incomes and hurt the economy. The rush to raise interest rates is understandable.
European central banks have also moved to raise interest rates one after another, and controlling inflation has become a common challenge for many countries.
Meanwhile, the BOJ decided on Friday to continue its monetary easing policy, with which the central bank has been guiding the long-term interest rate to around 0%. The central bank said the reason for this is that the economic recovery from the novel coronavirus pandemic has been slower than in the United States and Europe.
Raising the key policy rate would increase the burden of interest on housing loans and corporate borrowing, which could cool the economy. “We will support the economy by persistently continuing monetary easing,” BOJ Gov. Haruhiko Kuroda said.
However, monetary easing in Japan has caused the yen to weaken. This is because a widening gap between Japanese and U.S. interest rates will make it more advantageous to manage funds in the United States, and there will be more buying of the U.S. dollar. A weaker yen will further push up domestic prices for fuel and food, which have already soared due to the Ukraine crisis.
Households are suffering from rising prices of daily necessities. Kuroda was strongly criticized for his statement that “households are increasingly accepting price rises.”
If the BOJ continues its monetary easing while the yen’s depreciation, which is caused by the easing policy, is one of the factors contributing to higher prices, the central bank should explain what it thinks should be done to improve the situation.
The role of the government is also important. First, the government must support households by formulating specific measures to contain higher prices in fuel, electricity and food.
Wage growth is essential to overcoming high prices. From there, a virtuous cycle in the economy must be realized.
Measures must be expanded to promote wage increases, including for small and midsize companies, and to encourage the movement of people into fields where high wages can be obtained by developing human resources in information and technology through retraining. It is also important to strengthen the international competitiveness of growth industries, such as decarbonization and digitization.
It is hoped that the economy will regain its strength without relying on monetary easing.
