EDITORIAL | Watch How New BOJ Policy Will Affect Households, Small Businesses

On Tuesday, March 19, the Bank of Japan (BOJ) decided to raise interest rates for the first time in 17 years. By this action, it scrapped its negative interest rate policy. It also adjusted its framework for monetary easing.

The BOJ had been closely monitoring the large wage increases being made in the 2024 "spring labor offensive" (shunto). It made its move after concluding that achieving its goal of sustainable, stable price increases was coming into view. Having made that determination, it was only natural that it should move towards normalizing monetary policy.

BOJ's decision is indicative of the growing possibility that the Japanese economy will finally emerge from its state of long-term stagnation and strengthen its growth potential. We should recognize that we are at an important turning point on the road to achieving that goal.

If interest rates rise, that will have a wide-ranging impact on corporate activities and our daily lives. We must carefully watch how this process unfolds so that the new trend does not cool the economy. Meanwhile, we must do everything possible to prepare for a "world with interest rates."

It Took Longer Than Expected

The BOJ announced other changes besides abandoning its negative interest rate policy. For example, it will stop manipulating long-term and short-term interest rates to keep long-term interest rates down. Furthermore, it will stop purchases of exchange-traded funds.

This represents a historic policy change that marks the end of the strategy pursued under former BOJ governor Haruhiko Kuroda. Under Kuroda, BOJ implemented unprecedented large-scale monetary easing policies one after the next.

Current BOJ governor Kazuo Ueda held a press conference after the meeting that decided on the change in course. He noted that these large-scale easing measures had "fulfilled their role." Nonetheless, there is no denying that they took a long time to finish playing their assigned task.

*The Bank of Japan head office in Chuo-ku Tokyo, March 19. (©Kyodo)*

Large-scale Easing Policies

The BOJ adopted large-scale easing policies in response to the 2008 Lehman Shock and other economic challenges. However, unlike central banks in the United States and Europe, which shifted to tightening after the immediate problems had been brought under control, only the BOJ felt compelled to persist with its easing approach. That was because the depth of stagnation was so great during what came to be called Japan's "lost 30 years."

The BOJ's rosy predictions while seemingly forever proving unable to achieve its goal of a 2% inflation rate deserve criticism. However, they took place in the face of the ingrained popular view that prices and wages would not rise. This perspective is characteristic of periods of deflation. Therefore, the BOJ really had no other option than to continue large-scale easing.

It would be wrong, however, to underestimate the impact of this monetary easing in supporting the economy.

Watch for Economic Fallout

Of course, the prolonged large-scale easing has also magnified the resulting side effects. To hold interest rates down, the BOJ purchased massive amounts of government bonds, which distorted the functioning of the markets. Furthermore, the value of the yen continued to decline. This reflected the difference in interest rates between Japan and the US, which drove up the price of imports.

The BOJ made its recent decision, not to deal with these side effects, but because it now can see a virtuous cycle in which both prices and wages rise come into view. The policy significance of moving from the unorthodox easing policy towards normalization is considerable. It wants leeway to reduce interest rates in the event of a recession. Simultaneously, it intends to allow interest rates stuck near zero to return to a normal level as dictated by prevailing economic conditions.

The problem is that the new monetary policy will also have economic fallout. Therefore, for the time being, the BOJ intends to maintain an accommodative financial environment. It would carry out monetary operations to guide short-term interest rates to a level of around 0-0.1%. Meanwhile, to keep interest rates low, the BOJ also plans to continue purchasing government bonds at the same level as before.

*Keidanren Chairman Masakazu Tokura, Rengo Chairman Tomoko Yoshino, and others attend a government-labor-management meeting at the Prime Minister's Office on March 13. (© Kyodo)*

Eye on the Impact of Interest Rate Hikes

Many households are hurting from high prices, while quite a few businesses are being squeezed by rising costs of raw materials and wages. That being so, it is reasonable for the BOJ to remain accommodative and avoid drastic changes.

Nevertheless, as we begin to transition to a "world with interest rates," we must carefully monitor fluctuations in interest rates. For example, higher mortgage interest rates would increase the burden on household budgets. To what extent would the policy changes prompt such increases?

Companies that receive financing from financial institutions may also have concerns. Some small and medium enterprises have stayed in business based on the presumption of a long-term, ultra-low interest-rate environment. They will likely come under severe pressure if they are hit by rising interest rates on loans.

The BOJ must closely monitor developments like these. If long-term interest rates rise abruptly, the bank plans to carry out "fixed-rate bond-buying operations." By purchasing unlimited amounts of government bonds, they hope to hold down interest rates.

It is extremely important to move forward with care in conducting the flexible implementation of policies. We must pay close attention to whether future economic and price trends match the BOJ's projections.

Will the wage increases taking place at large companies spread to smaller businesses as hoped? With the labor shortage becoming more acute, it is no longer possible to hire people without increasing wages. However, even though they know the need for wage hikes, some companies may find they are unable to do so.

Now more than ever management will need to improve through increased productivity and the strengthened profit bases in growth fields. A major shift in monetary policy is now underway. Therefore, companies need to significantly step up their efforts in this regard.

(Read the editorial in Japanese.)

Author: Editorial Board, The Sankei Shimbun