Japan Earthquake Damage Surges... Will BOJ Delay Ending Negative Interest Rates in January?

Magnitude 7.6 Earthquake Strikes Noto Region
Power Supply and Factory Operations Halted in Nearby Areas
"Nominal GDP May Decrease by Up to 50 Billion Yen"
Negative Interest Rate Policy Unlikely to End This Month

As the damage from the magnitude 7.6 earthquake that occurred on the 1st in the Noto region on the central-western coast of Japan rapidly increases, there is growing speculation that the Bank of Japan (BOJ), Japan's central bank, may delay the timing of ending its negative (-) interest rate policy. This is due to concerns that economic damage could worsen as power supply and factory operations in nearby areas have been halted, leading to a contraction in corporate production activities and a slowdown in household wage growth.

Aftermath of the earthquake [Image source=Yonhap News]

According to local media such as the Mainichi Shimbun on the 5th, Japanese electronics giant Toshiba has suspended operations at its power semiconductor factory in Nomi City, Ishikawa Prefecture, where the earthquake occurred. Japan's largest steelmaker, Nippon Steel, has halted operations at its stainless steel product manufacturing plant in Niigata Prefecture, which was affected by the earthquake, and is inspecting its facilities.

As companies suspend production activities, economic damage is expected to increase. Nomura Securities, Japan's largest securities firm, forecasted that economic activities partially halted by the Noto Peninsula earthquake could reduce this year's nominal Gross Domestic Product (GDP) by up to 50 billion yen. This scenario assumes that economic activities in seven cities on the Noto Peninsula, including Jushi City, Wajima City, and Nanao City, are stagnant for a certain period. Since the scale of damage to housing, factories, roads, and other infrastructure is not included, the actual loss amount could be higher.

There is speculation that the BOJ may delay the expected end of monetary easing this year due to the earthquake. This is because if monetary tightening policies are implemented amid a situation where household consumption and corporate activities could shrink due to the earthquake's aftermath, it could negatively impact the economy. Japan has maintained a short-term policy interest rate of -0.1% since January 2016 to overcome prolonged deflation and low growth. However, recently, with rising prices and wages, there were high expectations that the BOJ would soon lift the negative interest rate policy and change its monetary policy stance.

Initially, the market expected the BOJ to end its accommodative monetary policy as early as the monetary policy meeting scheduled for the 22nd-23rd of this month. However, the Nihon Keizai Shimbun reported that "there is a need to continue assessing the impact of the Noto Peninsula earthquake, so such market expectations have been further postponed."

Following the earthquake's impact, Mitsubishi UFJ Morgan Stanley Securities predicted that the BOJ is likely to maintain its accommodative monetary policy at least until April. Morgan Stanley MUFG Securities also suggested that the BOJ could maintain its negative interest rate policy stance through the first half of the year.

With expectations that the BOJ will maintain its monetary easing policy for the time being, the yen has weakened. The yen-dollar exchange rate, which was 141.13 yen on the 1st, rose by 2.5% to 144.61 yen as of the morning of the 5th.

However, despite the earthquake's impact, there is no disagreement with the view that the BOJ will change its monetary policy stance within the year. The BOJ considers how strong the virtuous cycle between wages and prices is as a condition for raising policy rates. As of October last year, Japan's consumer prices rose 3.0% year-on-year, exceeding the BOJ's target of 2.0%. During the same period, the wage increase rate was 3.6%, the highest since 1994.

This content was produced with the assistance of AI translation services.