Global Econ-Insights #2: Bank of Japan in Limbo

Japan is perhaps one of the world’s most beloved nations. Japan, where neon jungles and electric metropolises flourish. Japan, where rich cultural practices blend with modern influences. Japan, ultramodern and futuristic on one hand, tranquil and traditional on another. So when recent decisions by the country’s central financial hub, the very Bank of Japan, yielded negative economic impacts, the nation began to lose its effervescent luster. 

The main problem? Inflation. Inflation is one of the deadliest economic curses that a country could face. Low interest rates cause an increase in inflation, which reduces the value of a nation’s own currency relative to other currencies across the globe. This makes imported items from other countries more expensive to the host nation, and items become even less accessible to the native populations, as the New York Times explains. In particular, low interest rates have recently contributed to huge Japanese inflation of the Yen relative to the Dollar. 

The Bank of Japan is responsible for interventions in the economy. Per Japanese guidelines, it is the bank’s duty and obligation to interfere when necessary and implement monetary policy to maximize price stability and combat the harmful effects of phenomena such as inflation. These economic details bring us to the crux of the current problem: the Bank of Japan is currently refusing to intervene and take action to combat the low interest rates and high inflation that the nation of Japan is currently faced with. Why is this the case? Because Bank of Japan Governor Kazuo Ueda believes that the bank “could afford to spend time eyeing the fallout from global economic uncertainties” and is “in no rush to raise borrowing costs further.” 

Though the Bank of Japan has previously voiced a desire to raise interest rates to engage in inflation reduction and achieve its target inflation rate of 2%, the chances of this actually coming to fruition currently seem quite minimal. Governor Ueda and the bank are now claiming that the best decision is for the bank to simply maintain its short-term interest rates at a steady amount of 0.25%, which is exceptionally low and conducive to higher inflation rates. The governor also rationalizes his approach by stating that though the Yen’s value is recently decreasing against the Dollar, this has in turn eased the prices of import costs and significantly reduced the risk of excessive domestic inflation within Japanese boundaries and jurisdictions. Consequently, the governor believes that the Bank of Japan “can afford to spend some time in making a policy decision,” cutting down on current monetary policy interventions and instead investing more into potential future ones. This sounds even more dubious considering the fact that the Bank of Japan’s set interest rates have historically been negative, only being hiked to a positive quantity in July of 2024 when the bank started facing maximal pressure to combat inflation by the public Japanese population of individuals. 

Therefore, my take on the matter is that the Bank of Japan may not be the most credible institution, and the best course of action is for the public to continue to try and persuade leading economic and governmental officials, such as the Governor Ueda himself, to do what is in the best interest for the Japanese population and thus hike interest rates to combat inflation rates. There is evidence that hiking interest rates is what is best for the Japanese population. When the Bank of Japan previously raised its interest rates from a negative value to 0.25% in July, the Yen finally gained value relative to the dollar. Whereas up until now, the Bank of Japan has been maintaining low interest rates so as to increase inflation within the deflationary Japanese economy, the time has finally come at which the harms of this inflation have begun to outweigh the benefits, and the only rational solution is to hike interest rates to reduce inflation altogether, despite the deflationary nature of the Japanese economy. Doing so is the key to maintaining a healthy and strong Japanese economy in a world where several national economies have become completely downtrodden due to inflationary concerns.