In a bold assertion that has captured the attention of both the financial and political worlds, Sayuri Shirai, a former member of the Bank of Japan (BoJ), recently suggested that should the United States escalate its tariff threats, Japan may have no choice but to raise its interest rates sharply by MarchThis assertion gains weight in the context of Japan's ongoing battle with rising inflation, a challenge that has been exacerbated by global economic tensionsThe delicate interplay of international trade policies and domestic economic health is scrutinized in her stark warning.

The U.S. tariff policy, a topic of much debate globally, has been a consistent source of instabilityInitially, the Biden administration postponed its tariff threats on goods from Canada and Mexico, indicating a potential pivot towards greater dialogueHowever, Sayuri Shirai emphasizes that this does not signify an end to U.S. tariff actions; rather, it may pave the way for threats to European goods and possibly even the imposition of tariffs

Advertisements

The ramifications of such a move would likely lead to heightened global inflation, a reality that Japan, as an export-reliant nation, would find particularly troubling.

In a recent interview, Shirai stated emphatically, “The BoJ is likely keeping a close eye on tariff developmentsGiven the current high levels of domestic inflation, March represents a viable opportunity to raise rates.” Her remarks stem from an understanding of Japan's current economic conditions, where despite overall sluggish growth, inflation has become a pressing concernThe nation is predominantly experiencing cost-push inflation, significantly driven by a weak yen, which has resulted in soaring prices for imported goods, particularly essential commodities like food and energy.

Many economists surveyed by foreign media expect the BoJ to increase rates just once in the current year, with most forecasts suggesting a rise to 0.75% by the third quarterNotably, none anticipate a rate hike during the BoJ meeting scheduled for March 18-19. In stark contrast, Shirai's perspective diverges from this consensusWith her current role as a professor at Keio University, she draws upon her extensive expertise in financial matters to assert, “If a weak yen is accelerating inflation and becoming a crucial issue for the Japanese economy, the Bank of Japan should acknowledge this and raise rates accordingly.”

The trajectory of the yen's exchange rate lends further credence to Shirai's viewpointDespite staging a recovery from a near 30-year low of 162 in July, analysts still contend that the yen remains undervalued

Advertisements

This undervaluation exacerbates the inflationary pressure by inflating import costs, significantly straining the Japanese economyThe BoJ made definitive policy shifts last year, moving away from a decade-long ultra-loose monetary stimulus framework, raising its short-term interest rate from 0.25% to 0.5% earlier this JanuaryThis shift reflects a growing confidence within the BoJ regarding the gradual sustainability of their 2% inflation target.

Shirai further elaborates that should the BoJ choose to raise rates to 0.75% in March, subsequent reactions to U.S. tariff policies could prompt another rate hike later this year to 1.0%. She argues, “There is a strong possibility that the BoJ could reach a 1% rate by the end of the year, despite the uncertainties regarding U.S. policies.” Shirai suggests that the BoJ may desire to raise rates while conditions permit, creating room for potential cuts during economic turmoil.

Nevertheless, the BoJ has been cautious regarding interest rate hikesThe current BoJ Governor, Kazuo Ueda, acknowledges that a weak yen could further escalate inflation by inflating import costsYet, the central bank has never explicitly stated intentions to raise interest rates to support the yen, as this could invite criticism from peers in the G20, being perceived as currency manipulationShirai offers a different insight, noting that long-standing agreements among G7 and G20 nations to refrain from using monetary policy to influence exchange rates exist to prevent countries from devaluing their currencies for trade advantages. “I do not believe any country would complain if Japan attempted to prevent excessive depreciation of the yen by raising interest rates,” she asserts.

Shirai's perspective provides a nuanced lens through which to assess the BoJ's potential monetary policy direction

Advertisements

Advertisements

Advertisements