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Japan's central bank just did something pretty extraordinary, something it hadn't done in nearly two decades, something that got the attention of markets all over the world. It raised interest rates. Here's Kazuo Ueda, governor of the Bank of Japan announcing the change this week.
And today's meeting. We took a thorough look at the recent economic, financial, and price developments, particularly in wages and prices, so.
This alone wouldn't be such big news. Central banks all over the world have been raising interest rates over the last few years to help fight inflation, but in Japan the rate hike was especially significant.
Today we've seen the Bank of Japan make a momentous decision.
This is Paul Jackson, who covers the Japanese economy for bloom And Why is this recent hike getting so much attention? He says, it's because Japan just raised interest rates to zero.
We've had negative interest rates in Japan since early twenty sixteen, and it's a very radical approach to central banking.
Negative interest rates. They've been a big part of Japan's radical economic stimulus for years, and we're supposed to get money moving in the economy and spur on inflation, because while the US has been battling inflation for the past few years, Japan has been desperately trying to bring it on.
And finally inflation happened, and so Japan is pulling interest rates out of negative territory to zero, well between zero and zero point one percent, and as low as the sounds, it's still an interest rate hike, and it's created some worries it'll slow the economy down too much, worries that Kazuo Ueda made sure to address during his announcement.
Now when he was speaking, repeatedly stressed the idea that we are keeping conditions easy, keeping them accommodative, meaning supportive. That means that on a scale of tightening activity in the economy.
Today on the show Chasing Inflation, Japan's prices basically didn't budge for two decades. Now finally they're on the rise. What that will mean for Japan's economy, for banks, for businesses, and for people who love imported chiefs, this is the big take. I'm Sarah Holder. This week, the Bank of Japan made a pretty splashy announcement it would raise interest rates for the first time in nearly two decades, and raising interest rates was seen as a kind of victorious moment,
says my colleague Paul Jackson. That's because it meant inflation had finally taken hold in Japan.
And if you look to Japan over the last couple of decades, one of the main problems is that there's a lot of money in Japan. It's just not moving around, and that's why there's been this obsession with trying to re establish inflation.
Wait a second, so inflation is a good thing. That's what they've been wanting to create.
That's right, inflation in Japan. They want inflation, they want prices to go up. It's not like other countries where the obsession is to keep inflation down. Policymakers in the past have had the view that money is just too stagnant. It's stationary. Companies aren't investing as much as they could. Consumers, households just park the money in the bank and the banks don't give them any interest and they don't really
do anything with the money. So there's all this cash sitting in Japan, excess cash for companies and for households, and it's doing absolutely nothing.
Absolutely nothing. Japan has been struggling with stagflation and deflation for decades. That's when prices stagnate or fall. And while falling prices might sound pretty great for an economy, it's a disaster. And these struggles happened on the heels of years of booming growth. In the eighties. Japan was an economic powerhouse, producing some of the world's most innovative products like the Walkman, the Camquarder, and cars like Toyota and Honda. And then, says Paul, things stalled.
Well, I'm afraid Japan lost that modjo in the nineteen nineties, and so we got into this stagnation, and part of it involved at prices going down. We got into deflation. And if you have deflation, that changes consumers behavior in a very profound way, because hey, look, okay, Sarah, you want to buy a washing machine, right, and if there's inflation, you know that that washing machine is going to be
more expensive in three months or six months. So if you've got the cash, what are you going to do? You are going to buy it. However, if you are in deflation, right, the price of that refrigerator is going to be the same or less in six months. So your incentive to use your spare cash to buy that a washing machine now is much more limited. In fact, you might wait until your current washing machine has broken down before you make that decision.
So the negative interest rates walk me through how that helps someone or encourages someone to buy a washing machine.
Well, the first thing to just clarify is that for all the talk of negative interist rates, we are talking about financial institutions, and the idea is to get them to use the money, building more growth in theomy, rather than just doing the safe thing and parking the money. And that's really the inflation story of Japan is that for decades, too much money has been parked either in bank or savings account or company coffers, just doing absolutely nothing.
So before global inflation got going, prices in Japan were basically stagnant. Paul says. That's exactly right.
In terms of consumers everyday life. Your cup of coffee, your pint of milk, your bowl of rice, you're on a giddy would have stayed at the same price year in, year out. And so when the cost factors with energy prices and all the supply chain problems following the pandemic and the war in Ukraine, companies in Japan, for the
first time in their generation, had to start raising price. Now, you might find this out to believe that some of the companies put ads in newspapers apologizing, saying we're really, really sorry.
So a couple years ago, prices started rising for the first time in about seventeen years. Inflation rose to about two percent, which is the bank's goal. So I asked Paul, why is the Bank of Japan just raising interest rates now?
Right. One of the reasons why the Bank of Japan didn't immediately pull away from stimulus when it hit two percent in the spring of twenty twenty two is because they said, hey, look, we've been seeking this target for a long time, and we've got to have stable, positive inflation cycle. And their view is that unless people are getting wage gains that are matching inflation or higher than inflation, then there's no chance that they can consume more because
they will be getting worse off. Right, And the whole point is they're trying to generate a positive inflation cycle that improves Japan's growth. Now, just to scroll back here, Japanese companies have been very, very miserly in terms of giving wage gains over the last decades, because over half the working population are in these kind of jobs where
essentially you're never going to lose your job. But the trade off, it's almost a social contract, is that Okay, you've got job security, but you do not have big wage gains. So the pay that people accept in this country is of a totally different, much much lower level than would be acceptable in the US. But if all your employees are saying, hey, hey, hey, boss, you know
I've got inflation of four percent. You know I need a bigger raise, then after a while you realize, hey, we are going to have to give them something.
Prices and wages have been rising for a while. The Bank of Japan decided the economy was on solid enough ground and it could bring interest rates back out of negative territory. When we come back, what will rising interest rates mean for Japan's economy? Who will the winners and
losers be from this historic change. We're back today. We're talking to Bloomberg editor Paul Jackson about the Bank of Japan's decision to increase its interest rates, which have been negative for years, and this raises the question, who are the winners and losers here.
Well, the rising of interest rates in Japan is going to create quite a few winners and losers, but the banking sector overall is going to win them. The government Japan has the biggest public debt load amongst advanced economies in the world, so if interest rates go up, then the government's interest rate payments, which are already a quarter of the annual budgets, are going to get even more expensive. So hey, the government is not going to be a winner,
is going to be a loser. Next, we've got the Bank of Japan. Well, the Bank of Japan has about six hundred trillion YenS worth of bonds. Over half the bond market is owned by the Bank of Japan, so those are going to go down. It is going to get paper losses on those, So Bank of Japan's going to lose out. Now, companies Japan's biggest companies, it's big exporters. They have global businesses. They benefit a lot from the
cheap yen. So if interest rates go up, the yen strengthens and the value of those profits made overseas for those big Japanese exporters are going to go down. They're going to take a hit, so this is a minus for them.
So let me get this straight. This is bad for the BOJ, it's bad for the government. Why are they going to do this if they are going to be losers along with big companies.
I mean, obviously all these things. It's the angle that you're looking at him. So in terms of the government finances, the government's finances and the boj's finances could take a hit from this. But overall, for the good of the
economy and the nation, this is a good thing. Getting into a positive inflation cycle that gets all the money that's there doing nothing moving around getting invested into companies that are growing and not supporting companies that are in a kind of zombiefide status and chewing up money and resources. But it is going to be uncomfortable for consumers and businesses, but ultimately the policymakers of the Bank of Japan and
of the national government overall this is the objective. So in those terms, this is going to be very good.
And what about these people, what will this mean for them?
If you're a homeowner, well, obviously interest rates go up, then your mortgage rate is eventually going to go up. So that's not going to be good for you. If you're a consumer and you like Italian wine and French cheese, well, if the en strengthens, that's going to get cheaper, so you're going to be happier. The flood of tourists coming into Japan, it's one of the cheapest places. The out of reach bucket list destination has become one of the
most exciting and affordable places in Asia. But it's going to become more expensive if the end strengthens, and.
It's helping French wine lovers, which is of course paramounts.
Absolutely.
Is there any scenario in which these rate hikes will backfire?
Hey, well, look, you know when whenever you have these policy changes, you are basically putting kind of more pressure on all the actors within the economy. They've got to kind of raise their game. It becomes more differentficult to make money, so it puts more pressure on the economy. Usually you get companies having to tighten the belts, maybe layoff people. As you go higher and higher up the
interest rate scale. This is tightening policy. And you'll have heard in the US, obviously Jerom Powell talking about the need to try and secure a soft landing This is the idea of trying to like close down activity in the economy just enough to take the heat the froth out of the economy and lower the price growth without going too hard on the breaks, and then having companies like lay off a whold sway of people and then getting into a recession and something that causes scarring in
the economy. Now, calibrating this, you probably want to move in small steps that may look fairly significant if you look at them one by one, But it's the trend and the impact as it filters through to the economy that's the important factor.
So what are you watching for as these higher rates roll out, either as an economic indicator or just as a person living in Japan?
Hey, I think it's that consumption, whether households can get into the mindset of hey, actually it's okay to spend because our wages are going faster than inflation. But I think the analogy here is of riding a bicycle. If you ride it, you can move forward, you can make progress. But getting on the bicycle and getting up to the critical speed on the bicycle, until you get to that moment, there's a lot of instability and you could fall off.
You might need training wheels first. Well, thank you so much, Paul. I really appreciate your time, my pleasure. This is the Big Take from Bloomberg News. I'm Sarah Holder. This episode was produced by Thomas lou and David Fox. It was edited by Stacy Vanick Smith. It was mixed by Ben O'Brien and Alex Sugiura. It was fact checked by Naomi. Our senior producers are Naomi Shavin and Elizabeth Ponso. Nicole Beemsterbor is our executive producer. Sage Bauman is our head
of podcasts. Thanks for listening. Please follow and review The Big Take wherever you listen to podcasts. It helps new listeners find the show. We'll be back tomorrow.