Japan’s economy expanded more quickly than expected in recent data, putting the Bank of Japan in a stronger position to consider another interest rate increase. The development marks a potential turning point for a central bank that has spent decades keeping rates near zero.
Japan’s economy grew at a faster pace in the latest reporting period, according to new data, giving the Bank of Japan — the country’s central bank — fresh grounds to move borrowing costs higher. The figures suggest that domestic demand is holding up well enough to withstand tighter monetary policy.
The Bank of Japan has been one of the most cautious central banks in the world when it comes to raising interest rates. For much of the past two decades, it held its benchmark rate at or below zero to fight deflation — a long period of falling prices that can weaken an economy by discouraging spending. That era appears to be ending. The bank raised rates earlier this year and has signaled it would raise them further if the economy cooperated.
Faster growth is one of the key conditions the Bank of Japan has said it needs to see before acting again. When an economy is expanding steadily, businesses and households are better able to absorb the higher borrowing costs that come with rate increases. Weak growth, by contrast, makes rate hikes risky, because they can slow activity further.
The yen and Japanese government bond yields tend to be sensitive to shifts in Bank of Japan policy expectations. A clearer path to rate hikes could support the yen against major currencies like the U.S. dollar, while also pushing yields on Japanese bonds somewhat higher. Both moves would have ripple effects across global markets, since Japan is one of the world’s largest economies and a major investor in foreign assets.
Investors and analysts will be watching for signals from Bank of Japan officials about the timing of any move. The central bank has been careful not to get ahead of the data, and policymakers are likely to want confirmation that wage growth and consumer prices remain on a steady upward trend before committing to another hike.
The next Bank of Japan policy meeting and any accompanying remarks from its governor will be closely watched for clues on the rate path ahead.
