BOJ Faces Backlash for Rate Hike Amid Japan Market Meltdown and Global Sell-Off

The Bank of Japan's recent interest rate hike has drawn heavy criticism after contributing to a historic decline in Japanese stocks and global market turmoil. Analysts now suspect the central bank may have acted prematurely, impacting economic stability.

Criticism Mounts Against BOJ's Rate Hike Decision Amid Historic Decline in Japanese Equities and Global Turmoil

A torrent of criticism has been directed at the Bank of Japan's recent monetary policy tightening, which has been attributed to the historic decline of Japanese equities and global market turmoil. This strongly suggests that any future interest rate increases will be postponed.

“The BOJ needs to be humble about economic data and the markets,” said Nobuyasu Atago, chief economist at Rakuten Securities Economic Research Institute and a former BOJ official. “The fact that the BOJ raised interest rates in the face of poor economic statistics shows that it did not pay attention to data.”

Last week, Governor Kazuo Ueda reiterated that the BOJ's decision to raise rates was based on economic and inflation data that demonstrated the developments were consistent with previous expectations. According to Bloomberg, he also stated that rates would continue to increase if this trend persisted. However, analysts are now beginning to suspect that the central bank may have acted prematurely in response to the most severe equity selloff in decades. Numerous individuals are altering their expectations.

“It was a poorly timed interest-rate hike,” said Mari Iwashita, chief market economist at Daiwa Securities Co.“The BOJ will have to wait and see whether the US economy will enter a recession or a soft landing before it can make the next move. At the very least, a September, October rate hike is now off the table.”

The yen's recovery from a nearly multi-decade low was facilitated by the BOJ's July 31 decision, which significantly impacted the purchasing power of Japanese consumers. However, the currency's recent rapid increase—it has risen by approximately 8% against the dollar in the past week—is detrimental to the earnings prospects of exporters, resulting in a decline in equities.

This is in the context of the BOJ discontinuing its program of purchasing exchange-traded funds, a tool that officials could have used to prevent equities from plummeting.

Most economists had anticipated an additional BOJ rate increase by the end of the year due to Ueda's hawkish statements before the recent market downturn. According to a Bloomberg survey conducted last week, 68% of respondents anticipated that the policy rate would increase to 0.5% by the end of the year, up from the current 0.25%.

Political Pressure Suspected as BOJ Tightens Policy, Raises Rates to Decade-High Level

The Japanese central bank gradually withdrew monetary stimulus after Haruhiko Kuroda preceded Ueda. This process involved widening the tolerance band for its 0% 10-year yield objective before abandoning it and reducing bond purchases. On July 31, the Bank of Japan (BOJ) increased its benchmark to the highest level in over a decade and reduced bond purchases, which exacerbated the perception of a change among certain global observers.

Political pressure may have been a factor.

“I can’t help but think that political factors were behind the decision,” said Otago. “I have no choice but to interpret this as a sign of communication between politics and the BOJ on how to deal with the weak yen.”

Atago stated that the consumption and production data needed to be more sufficient to support an increase in the rate. In each of the four quarters leading up to March, consumer expenditures decreased in real terms due to inflation, which reduced individuals' purchasing power.

Last month, in anticipation of the decision, two prominent members of Japan's ruling party took the unusual step of providing their opinions on BOJ policy. While discussing the BOJ, cabinet member Kono Taro spoke out against the weak yen, while heavyweight Toshimitsu Motegi urged the BOJ to demonstrate its intention to normalize policy more plainly.

Political Dynamics Shift as BOJ's Rate Hike Faces Mixed Reactions Amid Global Market Turmoil

The comments demonstrated the significant evolution of the political calculus over time. During deflation, politicians pressured the central bank to relax policy and delay tightening. In 2014, former Prime Minister Shinzo Abe publicly stated that the government had opposed the end of quantitative easing in 2006 and the abolition of the hostile interest-rate policy.

In an interview with reporters following the historic market movements on August 5, Finance Minister Shunichi Suzuki stated that he is closely monitoring the stock market with a high level of interest and that the government must remain composed in assessment of the situation.

However, some favor the central bank's most recent decision and attribute the recent market turmoil to the Federal Reserve's decision not to reduce rates and the data from the United States.

The BOJ didn’t move too soon as “normalization is the right thing to do,” said Jesper Koll, expert director at Monex Group Inc. and a long-running cheerleader for the nation’s equities. “Hiking rates in Japan was not the problem, but not balancing the rate hike with dovish language was a negative surprise.”

Jin Kenzaki, the chief Japanese economist and director of research for Societe Generale in Japan, predicted that the Bank of Japan (BOJ) would likely raise rates again in December if the market's assessment of the likelihood of a US recession decreases. He stated that the current market freefall has been more significantly influenced by developments in the United States, regardless of the specifics.

“If the market’s correctly pricing in a US recession, there’s of course a possibility that the BOJ decides against raising rates again this year.”