Central bank decisions have become more predictable. Not in Japan. Kazuo Ueda broke one of the cardinal rules of monetary practice with his recent shock hike in interest rates. Judging from his unrepentant performance in parliament last week, he absorbed few — if any — lessons from the episode. The unfortunate upshot will be an erosion of trust.
In several hours of testimony on Friday, the Bank of Japan governor pinned the blame for an early August market meltdown on anxieties about the U.S. economy rather than anything that transpired in Japan, let alone the July 31 rate increase. The problem is that this assumes the BOJ has no agency. America is the ball game. The Federal Reserve is certainly first among equals, but local decisions also matter.
Regardless of the root cause of the Aug. 5 collapse — the Nikkei 225 Stock Average fell more than 12% and the yen soared — the BOJ bears its share of responsibility. Wall Street endured a difficult day, but nothing like the Tokyo slump. The Japanese central bank erred when it raised its main rate to 0.25%, still very low by global standards. The mistake was not the change per se, but that it was combined with a plan to slash bond purchases and a new, hawkish forward guidance that projected multiple future increases. A majority of economists reckoned Ueda would demur on a hike.
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