The Repeated Failures of the Bank of Japan and the Details of Governor Ueda’s Shocking Remarks

Inflation target was “achievable with the status quo.” ……

The Bank of Japan’s stance has changed dramatically, and the discrepancies in monetary policy have become more noticeable. The BOJ has introduced an “inflation targeting policy. The policy target is to stabilize prices, and specifically, the target is a 2% year-on-year increase in consumer prices. Looking again at the BOJ’s price outlook, the inflation target will be achieved if prices continue to rise. If this is the case, then maintaining the current monetary policy is all that is needed.

Why should the BOJ raise interest rates now despite the fact that its monetary policy is working well? Moreover, if the BOJ’s forecast is realized, they will raise the policy rate further, but in that case, is there any risk of deviating from the inflation target? Unfortunately, there was no consistent explanation from Governor Ueda on these points, nor were there any questions from the press during the Q&A session.

BOJ Downplaying “Downside Risks” to the Economy

At the press conference, Ueda said, “One of the main reasons for raising interest rates is that it is better to make the adjustment a little early in order to achieve the 2% price target in a sustainable and stable manner. However, again, no clear rationale was given as to why the adjustment should be made earlier.

On the other hand, regarding the risk of rushing to raise interest rates when there is no problem, he reiterates that “real interest rates remain substantially negative, so the accommodative financial environment will be maintained, and the impact on the economy will not be large. The real interest rate is the nominal interest rate minus the expected inflation rate, and while it is true that the real interest rate has been significantly negative, we wonder if he is not underestimating the downside risk to the economy too much.

At the press conference, the BOJ repeatedly referred to its concern over the yen’s depreciation, which has caused prices to rise, and this seemed to be a strong motivation for the latest interest rate hike. Although foreign exchange policy is outside the BOJ’s jurisdiction, the BOJ has put monetary policy in charge of responding to the yen’s depreciation. In the first place, the weak yen was the driving force behind the Japanese economy’s escape from deflation. Although there may have been pressure from politicians and consideration for public opinion, this is a risky move.

Is this the beginning of the “Ueda recession?” ……

This series of moves is undeniably reminiscent of the Bank of Japan’s lifting of its zero-interest-rate policy in August 2000. The BOJ introduced its zero-interest-rate policy in February 1999, but lifted it in August 2000. However, at that time, the IT bubble had already begun to burst and stock prices in major countries were in the process of plummeting. Therefore, six months later, in February 2001, the BOJ was forced to cut interest rates again.

In fact, dark clouds are currently hanging over the U.S. stock market as well. Recently released U.S. economic indicators have been deteriorating rapidly, and along with fears of a recession in the U.S. economy, the possibility of the “AI bubble” or “EV bubble” bursting is being discussed.

The lifting of zero interest rates in August 2000 was a clear failure. The Bank of Japan’s interest rate hike in July may be a repeat of that event. Coincidentally, one of the two BOJ commissioners who opposed the lifting of zero interest rates in August 2000 was the current BOJ governor, Ueda. In order to avoid a “Ueda recession,” which could lead to a return to deflation, the BOJ should learn from the lessons of the past and quickly change course.