The Bank of Japan (BOJ) has elected to maintain the current rate of interest with no change, as predicted by the vast majority of polled economists. Trade protectionism, falling oil prices, and increased sales taxes were all influential factors that will impede economic growth prospects for Japan in the near future.
Key Takeaways
- The ultra-low Japanese interest rate is being maintained at minus 0.1%.
- Inflation is well-below the target of 2%, and a high consumer sales tax of 10% was outlined for next year.
- The central bank also voted to increase its holdings of government bonds at an annual rate of 711 billion USD.
The BOJ’s board chose to leave purchases of ETFs and other assets unchanged as well, while raising the consumption tax from 8% to 10% from October 2019 onwards. This is intended to increase the national revenue in order to accommodate for the rapidly increasing costs of social security for Japan’s aging population, but runs the risk of discouraging consumption and hindering economic growth.
The Bank decided, by a 7-2 majority vote;
Short-term policy: negative interest rate of minus 0.1 percent to deposits
Long-term interest rate: Bank will purchase Japanese government bonds so that 10-year yields will remain at around zero percent. https://t.co/HKlrHFN3Nf— Wazua (@wazua) December 20, 2018
Negative Interest Rates
The BOJ has been asked to reverse decades of deflation and hit a target inflation rate of 2%, an ambitious and difficult task. The BOJ has stepped up asset purchases since 2013 and eased monetary policies to record levels, with the bank making the decision to implement a negative interest rate at the beginning of 2016.
A “yield-curve control” policy which serves to maintain extremely low interest rates in the long-term through bond purchasing policy was introduced in September 2016.
However, the bank is still far off its 2% inflation target rate with core consumer prices (which exclude prices of volatile goods and services like fresh food and energy) staying at around 1% in October.
The extreme measures have led to concerns that the policies may disrupt other areas of the Japanese economy and financial system, and run contrary to the measures put in place by central banks in Europe and the US. The US Federal Reserve recently introduced the fourth rate hike of the year, and the European Central Bank recently announced an end to its 4-year program of buying up assets.
Expert Outlook
BOJ governor Haruhiko Kuroda stated that trade tensions were negatively impacting economic activity, saying “There are more downside risks to Japan’s economy,” and adding that those risks could have a broad impact on the Japanese economy as well as overseas.
However, he stated that the bank’s official outlook remains that the economy is moderately expanding, and pointed out that the bank could ease policy where needed.
Market Reaction
The US dollar hit a near-2 month low against the Japanese yen following the news which was released on Wednesday. However, a strong yen is actually viewed as negative for the Japanese economy which relies heavily on exports.
Gold has held gains from yesterday and is now trading at $1,257.44/oz and up 0.43% with a high of $1,261.64 and a low of $1,241.92.
Gold Price Chart
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