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Bank of Japan raises benchmark rate to highest level since 2008

Writer's picture: Adam GermanAdam German

On Friday, January 24th, the Bank of Japan (BOJ) raised the benchmark rate 25 basis points to 0.5 percent; the highest rate in 17 years. 


Now the question is what happens moving forward and to help dissect what could come to pass, below are two interviews with prominent economists whom have differing views..


On one hand, Andrew Tilton, who serves as Goldman Sachs' chief Asia-Pacific economist, offers an optimistic view of things to come.  


On the slightly more pessimistic hand is economics professor Sayuri Shirai from Keio University, who is also a former BOJ board member. 


Why does this matter to the residential real estate market?


The most direct impact is higher interest rates for home loans which could cool buyer demand.


Another, Japan-specific, indirect impact is the cost-push inflation experienced by businesses for inputs due to the weak yen.


Japan needs to import almost everything from food to energy. Eventually, those higher costs businesses pay must be passed on to consumers; the same consumers who drive demand in the residential property market.


Should wages not keep up with rising prices then buyer demand could cool for property moving forward.


More confidence that Japan getting to sustainable inflation: Goldman


 

Key Takeaways:

 

Sustainable Inflation in Sight 


  • Andrew Tilton from Goldman Sachs expresses confidence that Japan is nearing sustainable inflation, with levels projected to remain at or near 2% going forward. 


  • The Bank of Japan's gradual rate adjustments aim to support the continued gradual expansion of the economy. 


Monetary Policy Outlook


  • Japan’s current monetary policy remains supportive of growth, with real interest rates still low, providing room for further hikes without derailing economic progress. 


  • External factors, such as potential trade wars or global recessions, could shift the BOJ’s policy trajectory significantly. 


Yen’s Gradual Appreciation 


  • Goldman Sachs predicts the yen will strengthen against the dollar, moving towards 155 and eventually 150 by the end of the year. 


  • This outlook reflects expectations of Fed rate cuts later in the year and continued moderate hikes by the BOJ. 


Opportune Timing for Rate Hikes 


  • With headline CPI trending in the right direction, Tilton views this as an ideal moment for the BOJ to normalize rates gradually. 

 

Sayuri Shirai on Bank of Japan raising interest rates to highest in 17 years



Key Takeaways: 


Historic Rate Increase 


  • The Bank of Japan raised interest rates to the highest level in 17 years, signaling a significant shift in monetary policy. 


  • Governor Kazuo Ueda remains cautious, stating that Japan is still far from reaching a "neutral rate." 


Inflation Driven by a Weak Yen 


  • 85% of Japan's inflation is linked to food and energy costs, largely caused by the yen's sharp depreciation. 


  • Professor Sayuri Shirai warns that the yen could weaken beyond 160 to the dollar, further exacerbating inflation risks. 


  • Despite inflation reaching 3 to 3.6 percent, underlying inflation in sectors like services remains weak and below the Bank of Japan's 2 percent target. 


Challenges for Businesses and Consumers 


  • Large corporations have gradually passed rising costs to consumers, but small and medium enterprises struggle due to stagnant domestic consumption over the last decade. 


  • Stagnant demand limits economic recovery, making it harder for businesses to cope with higher import costs and inflation.

     

Global Trade Pressures 


  • 20 percent of Japan's exports go to the U.S., making it Japan’s largest trading partner. 


  • Proposed U.S. tariffs could lead to a “disastrous impact” on Japan's economy, which has seen near-zero GDP growth in recent years. 


Outlook for the Yen 


  • The yen’s volatility hinges on the strength of the U.S. dollar. 


  • Professor Shirai predicts that U.S. economic policies and interest rate differentials will heavily influence the yen's value in the coming months. 

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