BOJ’s Additional Rate Hike: Central Bank Should Thoroughly Examine Impact

Editorial

17:09 JST, January 26, 2025

With the additional interest rate hike by the Bank of Japan, the Japanese economy is set to reach a level of interest rates that the nation has not seen for a long time.

It is crucial for the BOJ to proceed with the operation of its future monetary policy by thoroughly scrutinizing the impact of rate hikes on households and companies.

The BOJ has decided to raise its key policy interest rate by 0.25 percentage points to around 0.5%. This is the first rate hike since July last year and takes the key rate to its highest level in about 17 years.

Despite signs of weakness in consumer spending, the Japanese economy has continued to recover moderately. There is also a growing possibility that high-level wage increases will be realized in this year’s shunto spring wage negotiations. No major disruptions have been seen in financial markets since the administration of U.S. President Donald Trump was launched on Jan. 20.

Given this situation, the BOJ appears to have concluded that the environment for an additional rate hike was in place. The hike can be also expected to stall to some degree the excessive depreciation of the yen.

In March last year, the central bank ended its negative interest rate policy and has since worked to return its monetary policy to normal. BOJ Gov. Kazuo Ueda told a press conference that the bank may continue to raise its policy interest rate and adjust the degree of monetary easing.

However, as the policy rate will be at a level that many people have never experienced before, it will likely be important for the BOJ to first carefully examine the impact of rate hikes on households and companies.

If mortgage rates rise, the burden on the working generation will increase. In addition, the trend to save money has strengthened among the public as real wages have yet to achieve stable growth amid prolonged price increases. It is hoped that the BOJ will deepen its analysis to see whether there will be any further negative impact on consumer sentiment.

Listed companies have shown upbeat performances, but many small and midsize businesses have struggled with rising raw material costs and a labor shortage. Last year, the number of corporate bankruptcies exceeded 10,000 for the first time in 11 years. The BOJ also needs to pay attention to corporate financing.

The central bank should also deepen its analysis on prices.

The core consumer price index, excluding fresh food, marked a year-on-year increase of more than 2% in both fiscal 2022 and fiscal 2023. According to the BOJ, the CPI is expected to rise by 2.7% in fiscal 2024, 2.4% in fiscal 2025 and 2% in fiscal 2026.

The BOJ has set a 2% price stability target. The bank believes that this target has not been achieved yet, as the current higher prices are largely due to a rise in import prices, and they have not been accompanied by sufficient wage hikes and a positive economic cycle.

However, companies have increasingly not hesitated to raise the prices of their products and services amid a widespread trend of passing on price increases. Does it not seem that the BOJ view is out of touch with the sentiment among members of the public, who have been suffering from high prices for a long time?

It was 30 years ago that the policy interest rate last exceeded 0.5%. The BOJ should sort out what its policies should be, based on changes in the economy, and provide thorough explanations.

(From The Yomiuri Shimbun, Jan. 26, 2025)