Japan is dealing with inflation like the rest of us. Many investors were betting that the Bank of Japan would scrap its ultralow interest rate policy, following the lead of the U.S. Federal Reserve, European Central Bank and others.
For central bankers in Japan though, it seems inflation has been a welcome development.
Unlike most of the world, Japan has been battling very low inflation for decades. The recent rise in global energy and food prices has changed that. And Japan’s policymakers hope some of that sticks, said Sebastian Mallaby, senior fellow at the Council on Foreign Relations.
“Now they’re thinking, ‘Great, let’s just hold on to this opportunity to finally get inflation psychology shifted in Japan,’” he said.
Mallaby said low inflation has not encouraged Japanese consumers to spend, which would help stimulate the economy.
“As consumers see that inflation is at 4%, maybe they’ll start to think, ‘Hey, I better buy that washing machine today because if I wait until next year, [it] will be 4% more expensive,’” Mallaby said.
Decades in the economic doldrums have prompted the Bank of Japan to pioneer all kinds of newfangled monetary policy tools, the latest being the yield curve control policy limiting the interest rate on long-term government bonds.
In December, the Bank of Japan raised that cap slightly, leading to expectations that it would join other big central banks and push interest rates higher.
“In fact, it looks like it was a slight pivot and a hold, as opposed to a marching down a new path,” said Kathryn Dominguez, a professor of economics and public policy at the University of Michigan.
The reluctance to make any big moves may stem from the imminent departure of Bank of Japan Gov. Haruhiko Kuroda, who spent a decade at the helm.
“There’s legitimate debate as to whether he’d be the one to want to end yield curve control if it is time to do so or whether he would rather wait for his replacement to make that decision,” said Guy LeBas, chief fixed income strategist at Janney Montgomery Scott.
That is, a replacement who has the time to see changes through and manage any fallout.
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