Japan’s central bank, BOJ, last night raised the country’s key interest rate above zero percent for the first time in 17 years.
– You can still call it historical, says the Japanese researcher Richard Nakamura at the University of Gothenburg, to News24.
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Why is Japan important to Sweden?
Japan is the world’s fourth largest economy after the USA, China, Germany.
The country is one of Sweden’s most important trade partners outside the EU. Japan’s stock market has been one of the world’s strongest in recent years.
Apart from China, Japan is Sweden’s largest export country to Asia.
Negative interest rate
Before the decision on Tuesday night Swedish time, the policy rate was between 0 and minus 0.1 percent. The minus interest rate has been a strange outlier to Swedish eyes because on paper you make money by borrowing them, but has been necessary for the country to be able to fight the problems of deflation – falling prices.
Through low interest rates, savings capital can also be pushed out into consumption, investments and home purchases, which has been needed to keep the economy going.
Richard Nakamura, Japan researcher at the University of Gothenburg. Government debt in Japan: 270 percent of GDP
The Japanese interest rate has been at the same level for 8 years.
Japan’s economy is highly leveraged. The national debt is equivalent to 270 percent of GDP, built up by decades of expensive fiscal stimulus.
– But you have to remember that 95 percent of the loans are from Japanese financial institutions, and the biggest lender is the Bank of Japan, says Richard Nakamura.
“The Specter of Deflation”
Both the negative interest rate and the stimulus package have been tools to tackle the negative price trend.
– You had to deal with the specter of deflation. Then you can discuss how effective it was, but now you signal that the danger is over for the time being.
Historically low wage increases
2024 will be a trend break in Japan. For many years, the economy has been strong and large export industrial companies have been able to make big profits. But it has been stingy with wage increases in the country.
– Therefore, the large influx of money has not benefited either Japanese households or the domestic consumer industries, the small and medium-sized companies.
Economic earthquake
Now the whole thing will change. Wages are expected to rise by as much as 5 percent in 2024.
– You could say it’s an economic earthquake. In the past, the unions have poked and prodded, but the wage increases have almost been at the decimal level. 5 percent is a decade of wage growth in Japan, says Richard Nakamura.
It’s happening now
So it bodes well for Japan’s economy in general – and the markets seem to agree. Despite some roller coasters, Japanese major company indices have had a positive trend in the past 24 hours.
On an annual basis, the Japanese stock exchange Nikkei’s large company index with the country’s 225 largest listed companies has had a meteoric career in the rates and went over the 40,000 mark on Tuesday. There has been a steady rise in the last week ahead of the expected interest rate announcement.
The Japanese stock market runs like a fast train
In one year, the Nikkei 225 has risen by 46.35 percent. In the last week alone, the stock market index has risen by 3.11 percent. That is almost as much as the Stockholm Stock Exchange rose during the whole of 2024.
That the Nikkei 225 rose by 0.69 percent even during the last trading day, when the Bank of Japan announced the interest rate hike, can be seen as approval from the markets.
– It is too early to say, but most things point to the fact that this decision, albeit historic, was expected and appreciated.
Expensive for the government
Although the Japanese government has expressed its support for the Bank of Japan’s decision, it is happening with some gnashing of teeth.
– They applaud the interest rate increase, but the elephant in the room is that Japan already spends 30 percent of its national debt on interest and amortization. This will probably mean that you have to spend even more money on this.
The other elephant in the room
To pay for the party, this may further pressure the government to implement a long-needed tax reform in the country.
– That is the other elephant in the room. Japan’s tax system is a patchwork of low taxes and high deductions. This could lead to a pro-growth tax reform, but it is not certain that it will be received positively.
In the last week, the Japanese yen has fallen slightly in dollar terms, from 146 to 150 yen per dollar. That loss has continued on Monday and Tuesday.
Read more about Japan and the economy:
Japan raises interest rates for the first time in 17 years
Japan opens up to more immigrants – must face the age crisis
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Pensioners lost half a billion on the giant’s gamble
The expert: Japan’s economy is shrinking – why is the stock market going up?