How does the Bank of Japan move interest rates? | Money Introduction [Banks, Interest Rates, Central Banks] 0055
The Bank of Japan raises interest rates.
When you hear news like that, don’t you find it a little strange?
Bank interest rates should be determined by each individual bank.
Even so, why does the Bank of Japan’s decision affect things like mortgage rates and corporate borrowing rates?
The secret lies in the lending and borrowing of money between banks.
Banks also borrow money
Just as we borrow money from banks, banks also lend and borrow money among themselves for short periods.
In Japan, one of the markets where these transactions take place is called the call market.
For example, one bank might be short on the funds it needs for the day.
Meanwhile, another bank might have a surplus.
So, the banks lend and borrow funds with each other.
Of course, there is an interest rate here as well.
The Bank of Japan places particular importance on these short-term money market interest rates in its monetary policy.
How does the Bank of Japan move interest rates?
The Bank of Japan influences short-term market interest rates through methods such as paying interest on current account deposits that financial institutions hold at the Bank of Japan, and by conducting transactions to supply or absorb funds.
These operations are called monetary market operations.
For example, when the Bank of Japan guides short-term interest rates to a higher level, it becomes easier for the interest rates banks pay when procuring funds to rise as well.
As a result, the impact can spread to interest rates on corporate loans and mortgages.
Conversely, if they guide short-term interest rates to a lower level, it can work to push down borrowing interest rates.
However, mortgage and deposit interest rates do not necessarily move by the same margin as the policy interest rate.
Interest rates change people’s choices.
For example, suppose a company is planning to build a new factory.
If interest rates are low, the burden of financing through borrowing is relatively small.
However, if interest rates rise, they might decide to forgo the investment.
Home purchases, capital investment, savings, and consumption.
When interest rates change, the timing of spending money and the decision of whether or not to borrow also change.
The Bank of Japan attempts to influence economic activity and prices through these channels.
In other words, interest rates are not just fees for borrowing money.
They are also important prices that relate to the movement of money throughout society.
So, why does the Bank of Japan sometimes raise interest rates, not only to support the economy but also to aim for price stability?