The differences in the direction of monetary policy between Japan and the U.S. are gradually becoming clear. The Bank of Japan should thoroughly explain its intention to continue monetary easing and be more vigilant regarding the trend of exchange rates
On June 15, the U.S. Federal Reserve Board increased the federal interest rate by 0.75%, raising the total to between 1.5 and 2%. This is the biggest rate increase in approximately 27 and a half years.
When the rates were raised by 0.5% in May, Jerome Powell, chair of the Federal Reserve Board, indicated that there would be another increase in June for the same amount. However, the growth rate of the U.S. consumer price index expanded again in May.
At a press conference, Powell insisted that the interest rate needed to be increased in order to curb rising inflation.
Excessive costs of living hurt people living in low-income households and cause a blow to the economy. Rushing to raise rates is understandable.
Central European banks have also raised their rates, and controlling inflation has become a common theme for many countries.
In contrast, the Bank of Japan decided on June 17 to continue monetary easing, which is keeping long-term interest rates around 0%. The reason for this is that Japan’s post-pandemic economic recovery is currently lagging behind those of Europe and the U.S.
The burden of increased rates would fall on mortgages and corporate lending, which could cool the economy. Haruhiko Kuroda, governor of the Bank of Japan, said the bank will “support the economy by diligently continuing monetary easing.”
Even so, Japan’s monetary easing is causing the yen to depreciate. If the difference between U.S. and Japanese interest rates widens, it will become more advantageous for companies to invest overseas and the economic trend of purchasing with American dollars will increase. The depreciation of the yen will exacerbate domestic price increases for necessities like food and fuel, which have already soared during the Ukraine crisis.
It is households that feel the pain of these increased prices. Kuroda received strong criticism for a statement he made saying, “households’ tolerance for raising prices is increasing.”
Because monetary easing is contributing to higher prices, the Bank of Japan needs to explain why it believes continuing such measures will improve the situation.
The role of the government is also important. First, it should support households by establishing concrete measures to control the cost of fuel, electricity and food.
Second, an increase in wages is essential to overcoming high prices. From there, we need to establish a virtuous cycle in the economy.
Such measures for wage increases should be created in a way that impacts small- and medium-sized business as well as larger corporations and should encourage and support workers migrating to high-paying fields such as IT human resources development where there may be a “relearning” period. It is also important to strengthen international competition in growing industries such as decarbonization and digitalization.
Hopefully, we can soon return to a strong economy that does rely on monetary easing, and goals like these can become a reality.
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