Core inflation in Tokyo, Japan’s capital, unexpectedly accelerated in September 2023, rising to 2.8% year-over-year, the highest level in 30 years.
This has put the spotlight on the Bank of Japan (BOJ), which has maintained an ultra-loose monetary policy in an effort to boost economic growth.
The BOJ is facing a difficult balancing act. On the one hand, it wants to avoid raising interest rates too quickly, as this could slow down economic growth. On the other hand, it needs to do something to address rising inflation.
The BOJ has already taken some steps to tighten monetary policy, such as reducing its asset purchases. However, it has so far resisted raising interest rates.
This is because the BOJ believes that inflation is still largely due to temporary factors, such as the war in Ukraine and supply chain disruptions.
However, the recent acceleration in core inflation may force the BOJ to reconsider its position. If inflation continues to rise, the BOJ may be forced to raise interest rates sooner than expected.
This would have a significant impact on the Japanese economy, as it would make it more expensive for businesses to borrow money and invest. It would also make the yen more attractive to investors, which could lead to a decline in the value of the yen.
The BOJ is under pressure from the government and the public to take action to address inflation. However, the BOJ is also facing a number of challenges, such as the risk of slowing down economic growth. It remains to be seen how the BOJ will balance these competing interests.
Here are some of the options that the BOJ may have:
Keep interest rates low:
The BOJ could keep interest rates low in an effort to support economic growth. However, this could lead to further inflation.
Raise interest rates:
The BOJ could raise interest rates in an effort to bring inflation under control. However, this could slow down economic growth.
Continue to reduce asset purchases:
The BOJ could continue to reduce its asset purchases in an effort to tighten monetary policy. However, this may not be enough to bring inflation under control.
The BOJ could do nothing and hope that inflation subsides on its own. However, this could lead to inflation becoming entrenched, making it more difficult to bring under control in the future.
The BOJ is likely to take a cautious approach and will carefully monitor the data before making any decisions. However, the recent acceleration in core inflation has increased the pressure on the BOJ to take action.