“Welcome back, Japan, to the normal economic world,” says Scheherazade Daneshkhu in the FT. The Bank of Japan’s well-trailed decision last week to raise its key interest rate from zero to 0.25% is a highly symbolic act, which hopefully marks the end of its long battle with deflation and the start of a return to stable economic expansion.
Markets took the decision calmly. In fact, bond prices rose and the yen fell against the dollar after doveish comments from the bank on the pace of future rate rises. Stocks slipped sharply, but this appeared to be a reaction to fears over the violence in the Middle East, rather than tougher monetary policy. The broad consensus in the markets and among commentators is that the pace of tightening will be very slow. “A quarter point is hardly anything. What’s more, rates are unlikely to rise again until next year,” says Jeremy Warner in The Independent. Indeed, some – including many in the Government – say that even this hike has come too early, fearing that the economy’s recovery is not yet fully established.
But a few dissident voices are suggesting that rates perhaps could and should rise faster than expected. There are indications that low rates are on the verge of leading to overspending, says Ambrose Evans-Pritchard in The Daily Telegraph. Indicators such as business investment plans, property prices and rents, and golf club fees are shooting up. Indeed, “Japan’s biggest problem in the next year or so may be not too little business confidence, but too much”, says Anatole Kaletsky in The Times, noting signs of overinvestment and complacency among business leaders. “The Bank of Japan may be right in pushing up the cost of capital further and faster than macroeconomic arguments alone would suggest.” Julian Jessop of Capital Economics thinks that markets are underestimating the likelihood of a sustained series of rate rises, ultimately reaching around 3%.
The move is “bullish for Japan, bearish for the world”, says Martin Hutchison on Breakingviews.com. Higher rates will suck liquidity out of assets worldwide, since many investors are using cheap money borrowed in Japan. So if rates rise faster than expected, many markets could see a rush for the exits. The initially calm response to the hike could prove short-lived.
Recommended further reading:
Find out what effect the experts think Japan’s interest rate rise will have on the US economy and the price of gold. Also see John Stepek’s Money Morning piece on this topic: How high will Japanese interest rates go?