This week, Japan’s central bank has increased the cost of borrowing to its highest level in 17 years—after the quick rise of consumer prices increased in December. The Bank of Japan (BOJ) raised their initial short-term policy rate of around 0.25%to around 0.5%. In July, there was a mass stock market selloff which was triggered by weak job reports and the BOJ reporting rates rising. In December, consumer rates increased to 3%. For several years now, Japan has been stagnating due to falling levels of consumer spending, with the initial indicators of negative growth appearing during the pandemic in 2020.
In addition, the BOJ is expected to raise their policy rate to 0.75%, the highest it has been since 1995. This is an indicator of Japan’s exit for an accommodative monetary policy. An accommodative monetary policy is when a central bank expands their money supply to help boost their economy. So, the central bank will stimulate economic growth by lowering interest rates, increasing their money supply and making it easier for businesses and individuals to borrow money. This can help increase consumer spending and investment, which can help reduce unemployment and support economic recovery when experiencing downturns.
The BOJ stated that they do not have a particular barrier to future rates. If they tightened their economic policy initiatives, then it would be harder for Japan to get back on a steady growth path. Their private consumption makes up half of their gross domestic product (GDP) and it is in shambles due to the price increases.
Also, the central bank is watching salary negotiations amongst the major Japanese companies, which are hoped to be concluded by March. The expectation of higher wages to increase spending. In 2024, the average pay increase was 5.1%, which is the fastest rise in over three decades, but the monthly raises remain quite volatile and unable to keep up with rising cost of living.
Japan’s economy as of 2023, was 9.2 trillion which makes up 263% of their GDP. Over the years of 1995 to 2023, the country’s nominal GDP fell from $5.33 trillion to $4.21 trillion. Wages fell around 11%as the country experienced a stagnated or decreasing price level. Japan has been facing several economic challenges which have been contributing to Japan’s stagnating economy. Japan has experienced supply chain issues, rising labor costs, poor birth rate numbers and several political issues have made it increasingly difficult for Japan to keep pace with several other economies.
Furthermore, Japan’s currency rate struck an all-time low, when it declined 151.95 against the dollar. This is because when the U.S. raised their interest rates, it led to an opportunity for investors to invest more heavily in the U.S. market. Many economists attribute the depreciation of the Yen to the difference between the U.S. interest rates and the Japanese interest rates.
Japan is facing several economic and political issues, stemming from low birth rates to the inability to keep up to pace with other economies. The next few months are going to be vital for the growth of Japan’s economy.
