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Last week, the Bank of Japan (BoJ) once again decided to hold its key interest rate at -0.10 percent and to continue its daily purchases of government bonds carrying a 0.25-percent yield. Today, the yen hit its lowest level against the U.S. dollar since October 1998.
The decision to forcibly hold bond rates low and not raise interest rates widens the gap between the BoJ and other central banks that are raising rates steadily in a struggle to contain inflation.
The bank believes Japan’s economy is too weak to withstand higher interest rates and the Bank of Japan has said it will maintain its ultra-loose monetary policy.
However, the currency’s withering value makes imports more expensive, particularly fossil fuels, which Japan has to import.
At a news conference after the meeting of the bank’s policy committee, BoJ governor Haruhiko Kuroda did not repeat his previous comment that rising prices were positive for Japanese exports and the larger economy.
Consumer prices in Japan are rising at their fastest pace in seven years, with the country’s consumer price inflation index reaching 2.1 percent. However, wages and salaries have barely budged.
Rising prices are becoming a key issue in next month’s parliamentary elections.
TREND FORECAST: Japan’s economy will remain weak as the global economy continues to slow down. Also, 78 percent of its oil consumption is imported. As prices for oil and natural gas rise further, so will Japan’s inflation rate and the economy will sink deeper.
The Bank of Japan is likely to be forced to raise its interest rate before next year.
In the meantime, as its yen is going down, Japan wants to greatly increase its defense spending “within the next five years” according to an annual economic policy document. Ratcheting up their war talk, the reason for the increase is because of concern about threats faced by China’s stance on taking back Taiwan.