The Bank of Japan Should Raise Interest Rates

In recent discussions surrounding Japan's economic landscape, a notable voice has emerged: Yoshikawa Hiroshi, a distinguished economics professor and former advisor to a past Prime Minister of JapanDuring a recent interview, he articulated concerns that the Bank of Japan (BoJ) is at risk of falling behind as it contemplates its monetary policiesHiroshi has recommended that the central bank should move to increase its benchmark interest rates without delay.

Hiroshi, who has enjoyed a close friendship with the current BoJ governor Ueda Kazuo for nearly six decades, expressed during the interview that the institution may already be lagging in response to economic conditionsHis remarks coincided with a heightened sense of anticipation in the markets about whether the BoJ might announce an interest rate increase within the next week or month.

The BoJ's decision on Monday to adopt an atypical schedule has caused some speculation regarding the expectations for a rate hike in December to wane

However, Hiroshi's comments underscore that an increase is still a plausible agenda for the upcoming meeting on ThursdayNotably, Japan currently boasts the lowest official interest rates among major economies, leading to discussions about the sustainability of such a stance.

"Japan's rate of 0.25% is exceedingly low," Hiroshi pointed outHis remarks came on the eve of a significant speech by BoJ Vice Governor Himino Ryozo in JanuaryHe contended that barring major shifts in the economy, a rate increase is not only reasonable but predictable—a reflection of a broader economic model rather than a mere hawkish stance.

This year, inflation in Japan has mirrored the levels seen in the United States and Europe, raising questions about the appropriateness of Japan's current lending costsProfessor Hiroshi contended that while Japan’s borrowing costs are too low, the interest rates should not have to reach the same heights as those in other developed economies

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He estimates Japan’s neutral nominal interest rate may hover around 1%.

As a member of a committee that evaluates Japan's economic cycles, Hiroshi has raised alarms about the BoJ potentially facing an economic slowdown or even a crisis during its normalization processThe current period of economic expansion in Japan began in May 2020 and has already surpassed many growth phases seen in the post-war era.

He warned, "The likelihood that the BoJ might have to lower rates again in the future should not be underestimated." If the rates remain at 0.25%, the only recourse would be to cut them to zero, indicating that preemptively raising rates when feasible is indeed a judicious approach.

Recently, Governor Ueda expressed similar sentiments in an interview, indicating that having the ability to lower rates during a downturn is vital, as unconventional monetary policies cannot fully substitute traditional interest rate measures

The market agrees with this sentiment, estimating the probability of a rate hike this month at around 28%, a substantial drop from about 66% at the end of last monthCitigroup revised its rate change forecast from December to January, asserting that the BoJ has little reason for haste.

The unusual scheduling of a speech by Vice Governor Himino in January, followed by a press conference before any policy decision, theoretically provides the BoJ an opportunity for further market engagement before making significant movesFollowing this announcement, the Japanese yen experienced a depreciation against the U.Sdollar.

Data trends imply that Japan’s economic performance aligns well with the BoJ's forecastsA report from the Japanese Cabinet Office disclosed that Japan's economic growth rate in the third quarter saw an upward revision, while key inflation indicators have remained consistently at or above the 2% target for more than two and a half years.

In an analytical critique, Hiroshi pointed out that the BoJ seems to signal that inflation is still not at an acceptable level, a viewpoint he speculated may not be universally shared among the Japanese populace

Furthermore, as an advisor to the BoJ, he emphasized that he does not possess inside information; his thoughts reflect his personal views founded on academic rigor.

The intellectual relationship between Hiroshi and Ueda extends back to their days at the University of Tokyo, where both pursued academic excellence, culminating in Hiroshi earning a PhD in economics from Yale University under the mentorship of Nobel laureate James Tobin.

“The Bank of Japan appears somewhat overly cautious,” Hiroshi remarked“Flexibility is paramount in monetary policyIf economic circumstances shift following a rate hike, the bank can simply lower rates accordinglyThis should not be viewed as a failure.”

In sum, the ongoing dialogue about Japan’s monetary policy reveals looming tensions around interest rates and the broader economic horizonWhile many economists echo Hiroshi's call for a rational adjustment to rates, external pressure and internal economic responses will dictate the ultimate path ahead

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