Bank of Japan is set to navigate against global monetary trends: QNB

Doha: Qatar National Bank (QNB) expected the Bank of Japan to continue its gradual process of interest rate normalization, with two additional 25 b.p....

Doha: Qatar National Bank (QNB) expected the Bank of Japan to continue its gradual process of interest rate normalization, with two additional 25 b.p. hikes this year that would take the policy rate to 1 percent on the back of still-high inflation, an improving macroeconomic outlook, and the need to adjust accommodative financial conditions.

In its weekly commentary, the bank said, "The aftermath of the Covid-pandemic brought inflation across advanced economies to skyrocketing levels not seen in decades. Following the pandemic and the Russia-Ukraine War, the "supply shock" of confinement measures and geopolitical disruptions were coupled with the "demand shock" from unprecedented policy stimulus, which drove inflation rates to multi-decade highs across the globe.

"As a response, most major central banks, such as the U.S. Federal Reserve and the European Central Bank, embarked on aggressive monetary policy tightening cycles to control inflation. The Bank of Japan (BoJ) was a peculiar outlier, following a different policy path that reflected Japan's decades-long struggle with deflation and stagnant economic activity. In stark contrast to its peers, the BoJ kept its negative short-term interest rate of -0.1 percent unchanged. This "ultra-loose" monetary stance led to a depreciation of over 40 percent of the Japanese Yen (JPY) against the U.S. dollar in October 2022. The sharp currency depreciation added to the different factors that pushed Japanese consumer price inflation to a peak of 4.3 percent year-over-year in January 2023, a level that had not been reached in this country in over three decades.

"After years of negative policy interest rates, the BoJ finally reacted with a highly-cautious hike of 15 basis points (b.p.) in March 2024, signalling the beginning of a much-awaited process of monetary policy normalization. Over the last year, the BoJ implemented additional hikes of 20 and 25 b.p., taking the policy rate to 0.5 percent at a moment when the major central banks of the US and Europe were already moving in the opposite direction towards easing. In this article, we discuss why the BoJ will continue to move against the global trend, and maintain its gradual process of monetary policy normalization."

QNB pointed out, "First, although inflation has come down from its peak, it remains stubbornly high with a recent upward tick that has renewed concerns. Inflation has remained above the 2 percent target of monetary policy for almost three years. Alarmingly, inflation surged to 3.6 percent in December last year, fuelled by higher food prices, the suspension of government energy subsidies, and wage increases. This new surge in prices reignited fears of a potential deanchoring of inflation expectations.