Bank of Japan Hikes Rates to 8-Year High

Toshihiko Fukui, the governor of the Bank of Japan, wanted to raise Japanese interest rates in December and in January. In both cases, he couldn’t get enough votes from the 9-man monetary-policy board of the BoJ to do so. Earlier this week, he finally pulled it off. Japan’s benchmark rate is now 0.5%, an 8-year high. Whether this is a hopeful event largely depends on where one sits and whether one is more concerned about an economic bubble or a relapse into deflation.

Japan has enjoyed reasonable economic growth recently. Third quarter 2006 was wobbly, but the fourth quarter positively boomed at an annual 4.8% rate. Last July, the benchmark interest rate was raised from 0.0% to 0.25%, effectively declaring the decade plus nightmare of deflation over. Consumption in Japan now counts for 55% of GDP, and households there have stopped their maniacal savings habits. Indeed, the household savings rate is down to 2.9%, very low by Japanese standards (and Americans should aspire to such a level).

However, the savings rate has dropped because household income lags corporate profits. To keep Japanese corporations in the black, the government has a policy of low interest rates and a weak yen. However, these corporations no longer have import restrictions to help them out, and the Japanese consumer is learning to buy Korean or Chinese rather than Japanese in some cases. As a result, any spending that doesn’t boost productivity is unpopular in the boardrooms. New equipment is OK, new employees or higher wages for current staff isn’t.

Higher interest rates will eat into that savings rate a bit more, and that is going to upset consumers customarily used to putting a few yen away out of every paycheck. There are local elections in April and elections for the upper house of the Diet in July. The rate hike had to come now if it were to occur this side of August. Those who are worrying that easy money might recreate the 1980s bubble felt a need to do so.

That said, excluding food items, December consumer inflation in Japan was 0.1%. With dropping energy prices, January’s rate might not even achieve this modest degree of needed price increases. Inflation is not Japan’s problem, deflation remains the risk. With luck, the BoJ’s increase is not premature and can be seen as a hopeful sign. By the end of the second quarter, the world will know.

© Copyright 2007 by The Kensington Review, Jeff Myhre, PhD, Editor. No part of this publication may be reproduced without written consent. Produced using Fedora Linux.

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