Prices and Interest Rates

Hello, this is Can-Papa.

Long-term interest rates in the U.S. are around 5.0%,
and Japan’s long-term interest rates have also risen to about 3.0%.
Interest rates are also rising in Europe.

The background to this is global inflation.

Surging energy prices, starting with crude oil, have caused prices to rise,
and central banks in various countries are raising interest rates.

This time,
I will think about the flow of
inflation and rising interest rates in order.

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■ The Beginning of Inflation

There are several causes for the current inflation in Japan.

Surging energy prices, starting with crude oil. Rising import prices due to the weak yen. Rising labor costs due to labor shortages.
And companies are also starting to

pass on

the rise in raw material and labor costs to their selling prices.
In other words, things bought from overseas are becoming more expensive, and the costs of producing goods and services domestically are also rising.

As a result,

the prices of various products are going up. This is the beginning of the current inflation.
The Bank of Japan also sees
rising crude oil prices and the weak yen as factors
pushing up prices.
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■ Countermeasures Against Inflation
If prices continue to rise,

the Bank of Japan will raise interest rates.

When interest rates rise, the burden on companies borrowing money increases.

The burden of home loans and the like also increases.
Corporate investment and individual
consumption are slightly suppressed. When that happens,
demand weakens, and the
momentum of price increases for goods and services can be suppressed.
This is the mechanism for raising interest rates to curb inflation (inflation countermeasures).────────■ Even Though Interest Rates Were Raised as an Inflation Countermeasure…

Generally speaking,

if Japanese interest rates rise,

the appeal of Japanese government bonds and deposits increases. Since the benefits of holding Japanese yen increase, it should theoretically work in the direction of a stronger yen.

However, currently,
U.S. long-term interest rates are around 5%.
Japan is around 3%.

There is a large interest rate gap.

Because of that,
some investors think,
“I would rather hold U.S. government bonds with higher interest rates than Japanese government bonds.” To buy U.S. government bonds, you basically sell yen and buy dollars. Then,

selling yen
↓
buying dollars

↓
weaker yen

a force like this is at work.────────

■ Unstoppable Price Increases

Japan

buys many things from overseas, such as crude oil,

natural gas,

food, and raw materials.

When the yen weakens,

more yen is required to import the same items.
Import prices rise.
Corporate procurement costs rise.

Selling prices rise.

Then, prices rise again.
In other words,
interest rates were raised to curb price increases, but

if high-interest assets overseas are more attractive, investor funds will head overseas rather than to Japan.
As a result,
even if interest rates are raised, the yen may continue to weaken.

Because import prices rise due to the weak yen,

price increases continue.

The reality is that price increases cannot be stopped by Japan’s financial measures alone.

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■ The Content of Inflation
If Japanese interest rates rise further in the future and the interest rate gap with overseas narrows,

the yen may be bought, and there is a possibility it will move in the direction of a stronger yen. However,

“If Japanese interest rates rise, the yen will definitely strengthen”

is not such a simple story. It is not just the interest rate gap;

expectations for the Japanese economy,
trust in fiscal policy,

corporate growth potential,
and overseas investment

all cause exchange rates to move due to various factors.

Therefore, it is dangerous to judge the health of the Japanese economy

by looking only at numbers like “prices have risen”

or “interest rates have risen.”

What is important is
whether Japanese industry is becoming stronger,

Japanese goods and services are being sought after from all over the world,

corporate profits and wages are increasing,

and prices are rising as a result.
Or,
is it that things bought from overseas are becoming more expensive due to the weak yen and rising energy prices,
and prices are rising?
Even if it is the same inflation,

the content is completely different.

In Japan today,
I think the impact of the latter is quite significant. That is precisely why, beyond just the result that prices are rising,

it is important to look at the causes and the flow.

And in the future,
I think we need to aim for a more positive inflation
that occurs because Japanese industry becomes stronger

and corporate profits and wages increase.