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Economy

BOJ lone holdout as peers turn to tightening

Low Japanese rates stoke yen depreciation, political tension

TOKYO -- The Bank of Japan is among the few remaining advocates of easy money as central banks in the U.S. and Europe look to tightening to control price growth, leaving markets hoping for yen depreciation and Tokyo susceptible to Washington's ire.

The U.S. Federal Reserve Board voted Wednesday to raise its benchmark interest rate for the first time in three months. "We have confidence in the robustness of the economy and its resilience to shocks," Chair Janet Yellen told a news conference after the group's two-day meeting. The U.S. economy is nearing full employment, and upward pressure on prices is growing stronger.

"Additional gradual rate hikes are likely to be appropriate over the next few years to sustain the economic expansion," Yellen said. The Fed has suggested that rates will be raised three times per year, targeting a federal funds rate of 3% in 2019. This is a step up from 2015 and 2016, when rates were hiked once per year.

Markets reacted little to the news. The Dow Jones Industrial Average in New York ended Wednesday up 0.5% at 20,950, while the Nikkei Stock Average climbed 0.1% to 19,590 in Tokyo on Thursday.

The European Central Bank is also considering an exit strategy. "I would say that risks of deflation have largely disappeared," ECB President Mario Draghi told a news conference March 9, stressing that the bank has emerged from its crisis-avoidance mode. More market players now suggest that a policy turning point will come in or after early autumn, once political events such as the elections in France and Germany have run their course.

Part with the crowd

The world has changed greatly from a year ago: Oil prices are no longer sliding, worries about emerging economies are on the retreat and the prospect of large tax cuts and greater infrastructure spending in the U.S. under President Donald Trump has buoyed investors' spirits.

But the BOJ is unmoved. The central bank decided at a two-day policy meeting through Thursday to keep Japan's sizable monetary easing program as is.

"There is a gap in underlying price movements" between Japan and its tightening-minded peers, BOJ Gov. Haruhiko Kuroda told a news conference Thursday. Though consumer prices are increasing, the central bank's 2% growth target remains distant. "Japan's interest rates are not going to rise just because those in the U.S. do," Kuroda said.

Recovery in the global economy has brought certain benefits to Japan. Corporate earnings are at record highs, and capital investment is climbing. But the virtuous cycle between wage growth and price growth has not yet begun to revolve as it has in Europe and the U.S.

The clear difference in direction between monetary policy in Japan and the U.S. should benefit this country's economy. A wider interest rate spread between the nations will encourage investors to look to the U.S., furthering the yen's depreciation against the dollar.

But politics could change that equation. The Trump administration has accused such nations as Japan and Germany of intentionally guiding their currencies weaker. No matter how loudly the BOJ defends monetary easing as a domestic policy to support prices and the overall economy, Washington could dismiss such an assertion. As bilateral economic talks planned for April approach, the BOJ must heed both the Trump team's criticisms and signs of Japan's sluggish price growth -- factors that are growing more difficult to balance.

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