Although the Federal Reserve and the rest of the world's central banks increased interest rates to contain inflation, the Bank of Japan has remained steadfast. Since 2016, the country's primary interest rate has been minus 0.1%.?
For years, Japan, the world's third-largest economic system, has struggled with deflation, or a continuous downward spiral of price levels. So, when prices are rising in most of the world, Japan is also experiencing inflationary pressures. However, its pressures are on a smaller scale.
Low-interest rates are intended to make borrowing more affordable, stimulating spending and investment. In that case, an individual's hard-earned money in the bank will earn little interest.
Inflation in Japan remains significantly lower than in the United States, where it has been hovering above 8%, and in many other countries.
Years ago, when inflation was almost zero, Bank of Japan (BOJ) Governor Haruhiko Kuroda established an inflation target of 2% in the hope that perhaps the threat of increased prices would stimulate businesses and consumers to purchase more sooner, allowing the economy to achieve "a virtuous cycle" of sustainable growth and development.
Inflation in Japan is currently around 3%, owing primarily to rising import costs for oil and gas, industrial components, food, and other products. The country's manufacturers and retailers have raised prices comparatively slower than the rest of the world.
Various factors influence currency markets, but the broader interest rate differential, particularly between the United States and Japan, indicates that the value of the US dollar has steadily risen as investors seek higher yields and a secure zone from market turmoil.
In three decades, the dollar has reached its highest level against the yen, currently trading at around 150 yen. A weak yen makes already-inflated import prices even more expensive. In addition, exchange rate fluctuations add to the uncertainty for businesses and policymakers. On the other hand, a weaker yen benefits inbound tourism by enticing travelers with much more spending power. When profits are translated into yen, it also increases earnings for Japanese exporters such as Toyota Motor Corp. and Nintendo Co.
The government confirmed in late September that the BOJ had purchased yen to help sustain the currency, the first time it had done so in more than two decades. It allegedly did it again recently. Analysts anticipate more intervention strategies if the yen falls too sharply.
Some doubts are growing about Japan's stance on maintaining a negative benchmark interest rate. Takenobu Nakashima, an analyst at Nomura Securities, contends that the BOJ has quietly reduced some of its asset purchases. But no one is expecting a sudden and drastic change.?
According to Nakashima, the end of Kuroda's second five-year term, which ends in April, could provide an opportunity for gradual change. When pressed in parliament recently by an opposition lawmaker to resign immediately due to a failed monetary policy, Kuroda steadfastly refused and stated that he had no intention of leaving.
Notwithstanding the currency pressures, Kuroda has managed to remain cautious at a period when concerns that the Fed and other central banks will increase interest rates too quickly or too far, resulting in stifling business activity and causing recessions, are growing.
In the April-June quarter, the Japanese economy grew at an annual rate of 2.2% due to increased consumer spending as coronavirus restrictions gradually lifted. The country is now open for tourism, and business is returning to normal.
According to Kuroda, Japan needs to keep interest rates meager to assist a fragile recovery from the pandemic.