Japan Raises Interest Rate

On July 14th 2006, BBC News published an article by Chris Hogg entitled 'Is Japan's economy back in business?'. While this is a good indication that Japan's economy is recovering, not everyone is excited. Here is the article:

The Bank of Japan's decision to raise interest rates by a quarter of a percentage point was not unexpected, but that should not diminish its significance.

The Bank is telling consumers, investors and analysts here and across the world, "Japan is back in business." "Monetary policy is all about stabilising long term expectations," says Dr Martin Schulz, a senior economist at the Fujitsu Research Centre in Tokyo. "This is a signal that the economy has recovered."

Robert Feldman, managing director of Morgan Stanley Japan, agrees. "This is now the second longest recovery in Japan's post-war history, so in hindsight, there is certainty," he says. "The question now is about the future, will it or will it not continue - and there's always uncertainty about that."

So what are the prospects for Japan's economy in the short to medium term, now that it has returned to a more "normal" interest rate policy?

The optimists point to a long list of economic indicators that are going the right way. Unemployment has fallen and still seems to be heading downwards. Prices in the shops are rising after years of deflation - that is, falling prices. Wages, which had been falling for several years, are now starting to creep up again. And the ratio of job vacancies to those looking for work is quite high.

The pessimists worry about what is happening to global growth. They fear that Japanese politicians and bosses could be getting complacent. But analysts say that, while it is prudent to take such factors into consideration, the outlook is basically pretty good.

Hiromichi Shirakawa, chief economist for Credit Suisse in Japan, believes that we will not see another rate hike before the end of the year. He is cautious about the global economic outlook - and he believes many Japanese companies are being over-optimistic about their prospects for growth and profits. "Input prices [the cost of raw materials used to make goods] are rising, but output prices [the price charged to the consumer] can't rise, because competition is fierce. "Because they're finding it difficult to pass those increased costs on to consumers, it hits profits. "I think that as a result, Japanese companies will find it hard to increase wages until the middle of next year, so it will be difficult to raise interest rates again until the second half of next year," he adds.

Much of the pressure to raise interest rates came from households, according to Dr Schultz. "Households were tired of zero interest rates," he says.

"The baby boomer generation born after World War II is about to retire and needs interest from their savings. Wages haven't risen that much during the last few years of their working life. "With little expectation of significant wage hikes in the next couple of years, they wanted higher interest rates."

But a study by the Dai-ichi Life Research Institute suggests only the rich and the elderly will really benefit from this very small rise. "The elderly are usually free of loans and so can enjoy the increase in their income from interest," says Hideo Kumano, the Institute's chief economist. "The younger generation, particularly those in their 30s, will have to pay more for their mortgages than they get back from any increase in interest income."

Japan used to be a nation of savers, but now one in four people here has no savings at all. And 12% of households hold more than half of all the money kept in savings and deposits. "There is a gap between the 'haves' and the 'have-nots' when it comes to benefiting from this rate hike", Hideo Kumano says. And that is a growing concern here in Japan - a country that once regarded itself as pretty uniformly middle-class is seeing an increasing disparity between rich and poor.

How to deal with that issue will be a theme that could dominate political debate here in the months to come, perhaps more than whether or not another rate rise is needed.