In most countries of the Western world, inflation has already exceeded the 5% level this year and led the central banks to raise interest rates – in the US for example up to 3.25%, in Israel up to 2.75% and in Europe to 0.75%. Compared to the other countries, the interest rate in Japan, the economy the third largest in the world, has been minus 0.1% since 2016. Interest rates have remained low to stimulate the Japanese economy, something that central banks stop doing as soon as they decide that economic activity in the economy needs to be reduced, for example due to inflation. Core inflation in Japan in September reached a peak of approx. 8 years and stood at 2.9%, although it is lower than most countries in the world, but of course it may continue to rise, despite this the central bank decided today (Friday) to continue stimulating the economy and leaving the interest rate unchanged.
The main problem facing Japan, which may indirectly lead the country to higher levels of inflation, is precisely the increase in interest rates of other countries around the world, the leader of which is of course the USA. The higher the interest rate in the USA rises while the interest rate in Japan does not move, the weaker the Japanese yen , which reached a 32-year low against the dollar.
As the Japanese currency weakens, the country’s import cost increases and the central bank has two options and it seems that it has chosen the more convenient option, but perhaps the more dangerous one. The bank could have chosen to raise the interest rate in Japan in order to increase the attractiveness of the wine against the dollar, but the bank chose the path of continuing to stimulate the economy by leaving the zero interest rate as it is while the government makes huge purchases of wine while getting rid of dollars.
The Japanese government has decided to stimulate the economy and protect its currency by a program in the amount of 200 billion dollars. The central bank raised its core inflation forecasts for the end of the year to 2.9% after standing at 2.3%. The central bank announced the purchase of Japanese government bonds in the amount of approximately 650 million dollars and now the question arises – is the central bank repeating the Fed’s mistake and incorrectly assessing inflation precisely at the stage when it is supposed to reduce it? The answer is not entirely clear, Mainly because of the weakening of the wine, but yes you can see thatThe wine and the economic growth are what occupy the decision makersnot necessarily the costs of living at the moment.
A problem most of us are not familiar with – deflation
Although inflation is a cause for concern, in fact, in recent years, Japan’s biggest problem has been deflation – a drop in prices, which has threatened stagnation in the Japanese economy. The Japanese economy grew by 3.5% in the second quarter of this year (in an annualized view), half of this figure was responsible for the private consumption of households, which could actually be harmed if indeed inflation continues to rise, which leads the central bank to find a tightrope between a rock and a hard place. Even if the bank continues with its Ionian approach, the main problem is of course that many conditions affect Japan, that’s the thing about globalization – The Fed’s interest rate hikes may be sharper than the central bank and the government in Japan expect And in the end, the amount of bonds and wine they will purchase will not be able to bring the Japanese economy to a safe place, it may be that the situation will actually lead them to be forced to raise interest rates too late.
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