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A view of the skyline and buildings at Shinjuku district during sunset in Tokyo, Japan June 20, 2021.
Will Japan raise interest rates … to zero?
Japan’s central bank will debate a landmark interest rate rise next week that could bring interest rates to a staggering 0% after nearly a decade of negative rates.
As the saying goes, there are four types of economies: developed, underdeveloped, Argentina, and Japan. While most countries have been working hard to cool inflation, Japan has struggled with the opposite problem, deflation, since the 1990s. Lower prices at the grocery store are nice, but consumers pay for it on the other end: Businesses see revenues fall, struggle to pay their debts, and lower wages or downsize to break even (mostly the former in Japan). The economy stagnates and ordinary families suffer.
Tokyo started running 0% interest rates in 1999 and negative interest rates in 2016 – in other words, encouraging companies to borrow money and keep cash flowing through the economy. It’s helped drive recent inflation, currently around 2.2%, above the target of 2%.
But is it the right kind of inflation? The Bank of Japan wants to make sure price increases are being driven by consumers spending more, and not costs on the producers’ side, before they hike rates. There are some promising signs, including Japanese trade unions securing the largest pay increase in 30 years from Japan’s largest corporations.
“All eyes are on the annual wage negotiations that will wrap up this week,” says Eurasia Group’s Japan analyst David Boling. “The Bank of Japan wants to see strong wage growth before it scotches the negative interest rate policy.”
We’re watching how cautiously central bankers choose to tack — if the climb to zero looks too steep next week, they can always wait until their April meeting.
Federal Reserve Chair Jerome Powell testifies to the Senate Banking Committee in Washington, DC.
Central bankers forecast clouds, with a chance of rate cuts
The millions of homeowners who have seen their mortgage payments double in recent years would no doubt concur with Mark Twain in his assessment of bankers – as the type of people who lend you an umbrella when the sun is shining and want it back as soon as it starts to rain.
Hopes for a break in the monetary policy clouds were frustrated this week as two North American central bankers said that interest rate cuts remain some way off.
Tiff Macklem, governor of the Bank of Canada, said yesterday that the bank’s governing council decided that rates will stay at 5%, at least until it meets again in April, as inflation of close to 3% means underlying pressures persist.
“We need to give higher interest rates more time to do their work,” he said.
The same day, Jerome Powell, chair of the Federal Reserve, told members of the House Financial Services Committee that the Fed is on a “good path” to achieving the desired “soft landing” of a growing economy with inflation back to its 2% target but that further progress is not assured.
The notes of caution come despite both US and Canadian economies avoiding recession. The US economy grew at an annualized rate of 3.2% last quarter. Even Canada’s anemic 1% growth rate suggests monetary policy is working to relieve price pressures, without choking demand.
Macklem said he is confident rates are high enough and that the discussion has now shifted to whether they need to stay at their current level.
Both central bankers characterized future progress as gradual and uneven, as wage growth remains in the 4-5% range.
But the unspoken pressure is political. A Liberal government in Canada will hand down a federal budget on April 16, less than a week after the next governing council decision. The budget date all but rules out the central bank's April meeting as a possibility for a rate cut, given the prospect of inflationary federal government spending.
In the US, it is an election year, which puts inevitable pressure on the Fed from politicians who will have to face angry voters. Powell said he acknowledged the risks of waiting too long to ease monetary policy and the damage that might cause the economy. But he said he did not want to ease credit conditions too soon and see inflation re-accelerate.
Investors expect an initial rate cut in June. Fed officials last year projected three quarter-point cuts this year, but Powell said the Fed would like to see more data to increase confidence that inflation is moving down to 2% before reducing the policy rate.
The benchmark rate has been held in the 5.25-5.5% rate since July.
For cash-strapped homeowners and consumers, the post-inflation rainbow can’t come quickly enough.
Governor of the Bank of Canada Tiff Macklem walks outside the Bank of Canada building in Ottawa, Ontario.
Know when to hold ‘em
As always, the bank said it may raise rates in the future if inflation picks up. But experts are warning that with mortgage renewals coming due for 74% of Canadian homeowners – roughly three million people – over the next year and a half, there will be a significant risk of default. Plus, the risk of a recession still looms. That may push the bank to consider a cut sooner rather than later. In September, Prime Minister Justin Trudeau predicted rates would fall by mid-2024.
Economists in the United States are thinking roughly along the same lines as Trudeau – though they’re a bit less optimistic. As the Financial Times reports, its FT-Booth survey expects the Fed will hold rates at a two-decade high until “at least” July, possibly later. The US economy has remained strong, with GDP growth hitting an annualized 5.2% in the last quarter.
Observers are watching for signs of a recession on both sides of the border while households stretch to meet monthly bills, rent, and mortgages. The Bank of Canada and the Fed will continue to walk a fine line between taming inflation and sending households over the financial cliff.
Shawn Fain, president of the United Auto Workers (UAW) speaks as President Joe Biden joins striking UAW members on the picket line in Belleville, Mich., in September.
Could union wage hikes worsen inflation?
It may be cold out, but bankers up north are sweating thanks to a flurry of union settlements that could, according to a new report from Toronto-Dominion Bank, have “staying power.”
For years, unionized workers’ pay failed to keep pace with inflation, but now labor negotiators are pressing to close the gap. The successful UAW strike in the United States led to 11% wage increases, and Canadian union settlements, though not as high, are rising as workers try to make up for ground lost to inflation.
This is not expected to slow the struggle against inflation in the United States because only 10% of the US workforce belongs to unions. But in Canada, where about 30% of the workforce is unionized, juicy settlements have a bigger economic impact.
While the deals should not be enough to cause inflation, they may make it harder to tame, and this could mean more trouble for Justin Trudeau’s embattled government if Canadian voters see inflation falling in the United States more quickly than in Canada.
Plus, Canadian homeowners are angry about the looming mortgage shock that will see many of them renew at higher rates. Finance Minister Chrystia Freeland just introduced the Canada Mortgage Charter, a set of voluntary guidelines to protect homeowners under financial pressure, that she expects banks to follow. But more than three million Canadians are facing mortgage renewals in the next 18 months, which means higher payments for most – as well as foreclosures for some.