EXPLAINER: What’s going on with the Bank of Japan single track?

TOKYO (AP) — Even as the Federal Reserve and other central banks around the world raise interest rates in an attempt to rein in inflation, the Bank of Japan has remained firm.

Since 2016, Japan’s policy rate has been minus 0.1%. The world’s third-largest economy has been battling deflation, or a continuing downward spiral in prices, for years. So, at a time when soaring prices are prevalent in much of the world, Japan is also facing inflationary pressures, but on a much smaller scale.

Low interest rates are designed to make borrowing cheaper, encouraging investment and spending. Your hard-earned money in the bank won’t earn much interest.

The big question is: what will the Bank of Japan, which holds a policy meeting on Thursday and Friday, do next?

WHAT ARE OTHER CENTRAL BANKS DOING?

The Fed embarked on aggressive monetary tightening to contain inflation, which is at its highest in several decades. Last month, the U.S. central bank raised its benchmark short-term rate for the third consecutive time to a range of 3% to 3.25%, its highest level since early 2008.

The rate started the year near zero, after central banks around the world cut interest rates and took other steps to counter the economic impact of the pandemic.

Some analysts expect the Fed to raise its key rate by three-quarters of a percentage point next month, the fourth such hike. This is triple the usual amount and would bring the rate to a range of 3.75% to 4%.

Many other central banks are also raising their rates. They also reduced or ended other monetary stimulus, such as purchases of government bonds and other assets to help pump more money into their economies.

WHAT ABOUT INFLATION?

Inflation in Japan is still much lower than in the United States, where it hovers above 8%, and than in many other countries.

Years ago, when inflation was near zero, Bank of Japan Governor Haruhiko Kuroda set an inflation target of 2%, hoping the threat of higher prices would spur businesses and consumers to spend more, sooner, so that the economy reaches what he calls a « virtuous cycle » of sustainable growth.

Today, inflation in Japan is around 3%, mainly due to rising import costs for oil and gas, industrial components, food and other products. Japanese manufacturers and retailers raised prices at a slower pace than elsewhere.

Kuroda said Japan needed to keep interest rates extremely low to support a fragile post-pandemic recovery. Inflation is expected to fall below 2% in the coming fiscal year, he said.

WHAT ABOUT CURRENCY COMPLICATIONS?

A variety of factors are affecting currency markets, but the widening gap between interest rates, particularly between the United States and Japan, has meant that the value of the dollar has risen sharply as investors seek higher yields and a « safe haven » from market turbulence.

The strong selling of the yen against US dollars has left the dollar at its highest level against the yen in three decades, now at around 150 yen.

A weak yen makes imports whose prices are already inflated even more expensive. And fluctuations in exchange rates add uncertainty for businesses and policy makers.

Conversely, a cheaper yen is a plus for inbound tourism, attracting travelers who have dollars with more purchasing power. It also boosts revenue for Japanese exporters like Toyota Motor Corp. and Nintendo Co., when their profits are translated into yen.

At the end of September, the government confirmed that the BOJ had bought yen to help support the currency, the first time it had decided to support the yen in more than two decades. He would have done it again on Friday. Analysts expect more intervention if the yen drops too drastically.

WHAT WILL THE BOJ DO NEXT?

The Bank of Japan has quietly scaled back some of its asset purchases and doubts are growing over its position to stick to a negative benchmark interest rate, according to Takenobu Nakashima, an analyst at Nomura Securities Co.

But no one expects a rapid drastic change. Nakashima suggested that the end of Kuroda’s second five-year term, which arrives in April, could provide an opportunity for gradual change.

When an opposition lawmaker recently pressured parliament to resign immediately over “failure of monetary policy,” Kuroda flatly refused.

« The fact that he failed is not factually correct, » Kuroda said. « I have no intention of resigning »

WHAT ARE THE OUTLOOK?

Despite the currency pressures, Kuroda remained cautious at a time of deepening fears that the Fed and other central banks could raise interest rates too quickly or too far, stifling business activity and causing shocks. recessions.

Japan’s economy grew at an annual rate of 2.2% in the April-June quarter as consumer spending rebounded as coronavirus restrictions were gradually lifted. The country has reopened to tourism and business is more or less back to normal.

Bill Mitchell, an economics professor at the University of Newcastle in Australia, says Japan’s approach is working well, though it may look like « a crazy system » from the outside. Even after a housing bubble burst in the early 1990s, the country kept unemployment relatively low, he said in a Zoom interview.

Raising interest rates will do nothing to solve Japan’s serious long-term problems, such as the shrinking and aging population, the main reason why its economy is growing so slowly.

« I think the Bank of Japan is doing exactly the right thing, » he said.

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Yuri Kageyama is on Twitter https://twitter.com/yurikageyama

Yuri Kageyama, Associated Press

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