Japan Kills the Free Money Era

After 12 years of cheap money, the Bank of Japan has finally moved interest rates back to zero.

BREAKING NEWS

After inflation finally started to bite the Japanese economy—the Bank of Japan has ended a wild period of extreme monetary policy by pushing their interest rates back to zero. It’s time to catch up to Jerome Powell

WHAT HAPPENED

We have been in a wild moment where Japan was keeping their interest rates negative in order to boost inflation and economic growth. This policy took a long time to work—and didn’t really accelerate growth in Japan until Russia’s invasion of Ukraine kicked inflation into overdrive. However, negative interest rates have been such a stark contrast to the Federal Reserve’s war on inflation that the Japanese Yen weakened considerably compared to the dollar. This made large, multinational corporations generate huge revenue gains just because U.S. revenue suddenly became 50% more valuable. 

END OF AN ERA

Now, Japanese firms are passing on all those gains to their employees with a sudden surge in wages. This is finally sustaining inflation in the Japanese economy enough that the Bank of Japan feels comfortable raising rates. While the process might not be done—this move is enough to help begin the process of strengthening the Yen compared to the dollar. The party’s not over yet, but the BoJ just turned the music way down. 

WHY IT MATTERS

While 0% interest rates are still much lower than other world banks, the Fed and ECB are set to at least begin lowering rates this year as inflation gets more and more under control. This decision by the Bank of Japan makes tomorrow’s Federal Reserve meeting and interest rate decision much higher stakes. How’s Jerome Powell going to play this one?