Editorial: Bank of Japan, gov’t must minimize rising interest rates’ impact on lives

The Bank of Japan (BOJ) faces a critical moment as it navigates monetary policy to transition to a world where the country actually has positive interest rates while minimizing the impact on daily life.

On July 31, the BOJ decided to raise its policy interest rate from the previous range of 0-0.1% to around 0.25% at its monetary policy meeting. This marks the first time in 15 years and seven months — since December 2008 — that the rate has been at this level. It follows the termination of the negative interest rate policy in March.

The bank will also reduce its purchases of long-term government bonds, which had been part of a quantitative easing policy. The purchase amount will be halved from the current 6 trillion yen (about $40.1 billion) per month to around 3 trillion yen from January to March 2026. This marks a tightening of both interest rates and quantitative measures.

Behind this decision is the historic depreciation of the yen, which at one point reached the 161-yen range to the U.S. dollar. BOJ Gov. Kazuo Ueda stated at a press conference, “We evaluated the risk of inflation as significant.”

The surge in import prices was diminishing the effects of wage increases from the spring labor negotiations, potentially further cooling personal consumption. In response to the need to curb further yen depreciation, senior government officials, including Liberal Democratic Party Secretary-General Toshimitsu Motegi, urged the central bank to raise rates.

With this change in monetary policy, mortgage and borrowing rates will also rise. While Ueda emphasized that “interest rates remain very low” even after the hike, the prolonged zero-interest rate era means the impact on households and small and medium-sized businesses cannot be underestimated.

According to GDP statistics for the first quarter of 2024, personal consumption has declined for four consecutive quarters. With wage increases not keeping up with inflation, there is growing concern in the retail industry that “thriftiness is on the rise again.”

Ueda also expressed a willingness for further rate hikes, assuming that price rises move steadily toward the BOJ’s 2% target. However, the sustainability of a “virtuous cycle of wage and price increases” remains uncertain. Due to these uncertainties, two monetary policy committee members opposed the rate hike, arguing that economic and price trends needed further observation.

For the revitalization of the Japanese economy, normalizing monetary policy is essential. However, proceeding with rate hikes without sufficient consideration for the daily lives of residents could stall the economy, negating any benefits. The BOJ must make precise judgments by closely monitoring personal consumption trends and other factors.