Why Japan is the only major economy to maintain negative interest rates and what consequences this has for the country

At the same time, the Japanese currency, The yen is in free fall.

Conventional economic prescriptions say that raising interest rates could alleviate both problems. However, many are not convinced that this is the solution for the Asian country.

With much of the current inflationary pressure coming from a strong dollar and rising energy and food imports, some economists believe that the Japanese authorities’ room for maneuver is quite limited for now.

And while the interest rate hike could partially help the country move closer to its 2% annual target, what is not clear is that it will halt the yen’s slide.

In other countries, rate hikes by their central banks have done little to protect their own currencies from the mighty dollar, for now.

Negative interest rates tend to reactivate the economy.

In practice, this means that the country’s central bank, which is the monetary authority, charges commercial banks a portion of the reserves they hold in the institution.

Since it is more expensive for commercial banks to hold reserves, the measure was designed to encourage banks to use these reserves for lending to entrepreneurs in an effort to revive economic activity.

The Bank of Japan claims that the current increase in credit prices would only suppress already weak demand and delay the fragile post-pandemic recovery.

Japanese history has its twists and turns that set it apart from the rest.

For years, the country was mired in painful deflation (a general fall in prices) that contributed to economic stagnation.

Just what Japan needed was an increase in the cost of living to stimulate economic growth. However, analysts say, the inflation that exists today in Japan it is not a reflection of true reactivationbut more the result of the external crisis and the fall of the yen.

From this point of view, what Japan would need is “good inflation,” the kind generated by strong consumer demand.

But the current kind of “bad inflation,” experts say, is one created by a strong dollar and product shortages linked to the pandemic and the war in Ukraine.

The central bank considers this price increase to be temporary and therefore prefers to leave rates below zero.

That’s why the top monetary authority, Haruhiko Kuroda, insisted that the economy was too weak to bear higher interest rates.

Traditionally, the yen has always been considered a refuge in times of storm, and that is why every time there is a crisis, investors protect themselves by buying the Japanese currency.

But that status is now being questioned.

This year alone, the currency has lost a fifth of its value against the dollar, reaching the lowest price since 1990.

Why? The yen’s decline was driven by the difference between interest rates in Japan and the US, explains BBC reporter Mariko Oi.

While the world’s largest economy aggressively raised its interest rate to 3.25%, Japan remained below zero.

Higher interest rates make the currency more attractive to investors.

As a result, there is less demand for currencies from countries with lower exchange rates and these currencies lose value.

Some experts believe the yen’s weakness also reflects the state of the country’s finances, with an economy that has barely grown in the past three decades.

To this we must add that Japan is the most indebted country in the world and that it carries a a demographic time bomb due to the low birth rate.

The government has allowed some foreign workers to help deal with the aging population, but there is still strong opposition to the immigration policy.

“There is no reason to strengthen the yen”Takeshi Fujimaki, a former adviser to billionaire investor George Soros, tells the BBC.

Japan has not intervened in the foreign exchange market to support the yen for almost two and a half decades.

However, last month, when the currency fell, the authorities stepped in and spent $21 billion. That move helped for a while, but soon the currency fell again, this time passing 150 yen to the dollar.

Some reports indicate that he had to intervene again, says Mariko Oi, although the Japanese government denies this.

In any case, domestic analysts believe that such an intervention can only have the right effects.

“This is to show the Japanese government’s stance that it does not want the Japanese yen to weaken further,” said Eisuke Sakakibara, a former senior official at Japan’s finance ministry.

Any country whose currency loses value faces negative effects. A weak yen has made everything Japan buys abroad more expensive.

The country relies heavily on imported oil and gas. Due to exchange rates and rising energy prices, the amount of money you spent on imports last month increased by 46%.

But on the plus side, the money Japanese exporters earn abroad is worth much more at home. Since exports account for about 15% of the country’s total economic activity, this is a boon amid bad news.

From the consumer’s point of view, the Japanese have lost half of their purchasing power over the past decadewhich has caused a serious problem as average wages in Japan have barely risen in more than three decades.

Current inflation, although reaching only 3% compared to other developed countries that have levels of more than 10% per year, is something to The Japanese were not used to that.

The big surprise was caused by a 20 percent increase in the price of one of Japan’s most common snacks, umaibo, a product whose price has always been 10 yen ($0.075) since its inception 43 years ago.

Such was the influence of Yaokin, a company that makes popular snackshe had to launch an advertising campaign explaining why she was forced to raise the price.

As was inevitable, one by one the products rose in value. According to Teikoku data bank, the prices of more than 10,000 food products will increase by an average of 13% this year.

“Consumers they are not used to accepting inflationTakeshi Niinami, chief executive of Suntory Holdings, the company known for Japanese whiskeys Yamazaki, Hibiki and Hakushu, as well as beer and soft drinks such as bottled water and coffee, tells the BBC.

That dissatisfaction is a challenge facing the government of Prime Minister Fumi Kishida, who has so far fully supported the central bank’s decisions to keep interest rates on hold.

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