Bank of Japan raises rates to 1.0 per cent, cites oil price pass-through and inflation risks
New Delhi, June 16
The Bank of Japan raised its short-term policy rate on Tuesday to 1% from 0.75%, The Policy Board approved the move by a 7-1 majority vote. The new guideline for money market operations will take effect from Wednesday.
The interest rate applied to the complementary deposit facility, paid on current account balances held by financial institutions excluding required reserves, was raised to 1.0 per cent. The basic loan rate under the complementary lending facility was set at 1.25 per cent. The basic discount rate was also set at 1.25 per cent, though bill discounting remains suspended. One board member, Asada Toichiro, dissented. He argued downside risks to production and employment from the Middle East situation outweighed upside price risks, and said the BOJ should maintain the prior guideline.
The BOJ said the hike reflects its view that Japan's economy has recovered moderately despite some weakness tied to the Middle East situation. Higher crude oil prices are exerting downward pressure on activity. But the economy is supported by high corporate profits and improving employment and income conditions. The risk of a sharp slowdown has decreased, aided by government measures to cut household energy costs and progress securing alternative raw material supplies.
On prices, the year-on-year CPI increase excluding fresh food has recently run below 2 per cent due to those energy subsidies. However, the BOJ flagged faster pass-through of higher crude oil costs in business-to-business transactions. That could spread to consumer prices across a wider range of items. Medium- to long-term inflation expectations have also kept rising. With underlying CPI inflation approaching 2 per cent and financial conditions staying accommodative, the BOJ judged it appropriate to dial back accommodation to keep inflation anchored at its 2 per cent target on a sustainable basis.
The central bank said accommodative conditions will persist even after the rate change, continuing to support activity. Going forward, it will keep raising the policy rate and adjusting accommodation based on economic, price and financial developments, while watching the Middle East impact and risks to its baseline outlook.
— ANI
Reader Comments
The BOJ's focus on oil price pass-through is key. Here in India, we've seen petrol/diesel prices subsidized but it's still hurting. At 1%, Japan is still deeply accommodative. RBI is at 6.5% and still fighting inflation! Different worlds, but both struggling with the same Middle East uncertainty. The dissenting board member has a point about employment risks though.
As an economist working in Tokyo, I can tell you this was widely expected. The 7-1 vote shows strong consensus. The BoJ is finally normalizing after years of negative rates. For Indian investors with yen exposure, this could mean gradually stronger yen going forward. Something to watch if you're tracking NRI remittances or trade.
The BOJ acknowledges that 'underlying CPI is approaching 2%' but that's with massive energy subsidies. Remove those and inflation would be much higher. It's like our government keeping fuel prices artificially low before elections. At some point, you have to face reality. The hike is modest but sends the right signal about commitment to price stability.
One key takeaway: the BOJ says 'accommodative conditions will persist even after the rate change.' So this isn't a tightening cycle like RBI's. Japan's still supporting growth. The dissent from Asada Toichiro about Middle East risks is valid - every time oil spikes, Japan and India both feel it. At least our PM is negotiating with Russia for cheaper crude!
Japanese banks are finally getting some margin relief after years of ultra-low rates. For Indian banks with Japanese operations
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