News | Question of the Week, WC 21st January
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Q: Can we really say that a BoJ rate hike would be expansionary?
A: This question has cropped up again since late last year, when a BoJ think tank paper sought to answer it, in the context of 2016. We’ll never know the answer for sure, especially as GDP growth is now likely to slow anyway. We can make an argument that less negative real rates would benefit fixed income streams, which are particularly important in Japan’s ageing society. But the more important point is that negative rates probably aren’t stimulating the economy at this stage. Yet they are contributing to the build up of financial risks. We see building side effects in the current framework, and the BoJ itself has noted that a slow-burn erosion of bank capital, could end up amplifying an economic downturn. Taking a long view, therefore, if there were any short-term tightening impact from ditching negative rates it likely would be outweighed by warding off future financial risks. That argument made clear sense mid-way through last year, and helped us to call the July policy tweaks. It is now harder to make, with the economy is slowing. But we still think that the BoJ has a short window of opportunity for further policy adjustments, as housekeeping measures.
Freya Beamish, Chief Asia Economist
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Posted: 25th Jan 2019
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