Japan Raises Interest Rates: A Historic Shift for the Only Economy That Always Resisted Inflation

Japan Raises Interest Rates: A Historic Shift for the Only Economy That Always Resisted Inflation

After 17 years, the Bank of Japan has decided to raise interest rates. While the global economy has been engulfed in an inflationary phase, Japan was still the only country in the world that remained faithful to its strategy. However, even they have had to concede.

From -0.1% to 0.1%. The interest rate change in Japan is small, but it marks a significant shift that hasn’t occurred in nearly two decades. The Bank of Japan has moved from negative to positive interest rates.

Inflation had reached 3.3%, and although they were hesitant to consider it structural, they have now confirmed that they indeed see signs of a “more solid” cycle of price and wage increases.

A strategy followed since the 90s. Keeping interest rates negative was Japan’s strategy to combat inflation since the 90s. This monetary policy had made them a global exemplar, at least as a case study. But the pressure of high inflation has made it inevitable for the Bank of Japan to make this decision.

According to the institution, they aim to achieve “the target of 2% annual inflation in a sustainable and stable manner.”

Wages will rise. The wage increase negotiated by major unions and the management of companies like Toyota is at 5.28%. A better-than-expected salary increase aligns with this new strategy of positive interest rates.

For the first time, Japan has embraced the idea of growth. The country will raise wages and prices. “The Bank of Japan has today ended an era of exceptional monetary policy accommodation,” concludes Morgan Stanley.

The yen remains subdued. The initial reaction of the Nikkei, Japan’s main stock index, was not particularly positive. In the first few hours, it fell slightly and is currently up by 0.6%. While it has grown 21% over the last six months, the yen has fallen by 16% against the euro, going from 140 a year ago to about 162 yen per euro now.

“In these circumstances, it is necessary to pay due attention to the developments in financial and foreign exchange markets and their impact on Japan’s economic activity and prices,” explains the Bank of Japan. We’ll see how their economy evolves, but what we do know is that a new era has begun.