Japan’s interest rates hit their highest in 17 years

Summary

Marketplace Morning Report: Japan’s Interest Rates Hit Their Highest in 17 Years
Hosted by Marketplace, Released on January 24, 2025

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Introduction

In the latest episode of the Marketplace Morning Report hosted by Sarah Rogers, the focus centers on Japan's recent monetary policy shift, its implications for the global economy, and related economic developments. The episode delves into Japan's historic interest rate increase, its impact on borrowers and the economy, comparisons with other major economies, insights into the UK’s trade dynamics, and innovative sustainable practices in rice production amidst climate change challenges.

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Japan’s Historic Interest Rate Hike

Japan's Monetary Policy Shift

At 00:57, Sarah Rogers introduces Mariko Oy from the BBC to discuss Japan's unprecedented move to raise interest rates to 0.5%, marking the highest level in 17 years. Mariko Oy explains the context behind this decision:

“Japan has had falling prices, known as deflation or very, very little inflation, for decades. So back in 1999, the Bank of Japan became the world's first central bank to cut interest rates to zero, basically trying to encourage spending and investment, but that didn't really work” (01:04).

Historical Context and Recent Developments

Mariko highlights that despite aggressive monetary easing, including negative interest rates introduced in 2016, Japan struggled with stagnant economic growth. The recent rise in prices, driven partly by global factors like the war in Ukraine affecting food and fuel costs, compelled the Bank of Japan to abandon the negative rates policy in July, raising rates to 0.25%. This move initially led to a significant sell-off in the stock market, prompting cautious optimism among officials.

“It's good news in terms of normalizing the monetary policy of Japan. Not so good news if you have a mortgage” (02:06).

Implications for Borrowers and the Economy

Sarah probes the potential risks of rapid rate increases, to which Mariko responds cautiously:

“I don't think we'll see any major market reaction this time around. And in terms of further rate hikes, I think a lot of economists are expecting more to come, but they have been so cautious after that sell-off. I think they've learned their lesson and they'll probably try their best to avoid that” (02:14).

This sentiment underscores a balanced approach by the Bank of Japan to support economic stabilization without triggering another market downturn.

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Currency Strength and Corporate Performance

Yen Strengthens Against the Dollar

Following the interest rate hike, the Japanese yen saw a notable appreciation, strengthening by approximately 2.10% against the US dollar. This currency movement reflects investor confidence in Japan's economic policies and the potential for higher returns on Japanese assets.

Burberry’s Resilient Sales Amidst Trade Tensions

The episode also highlights Burberry’s performance, where the British fashion house reported a smaller-than-expected decline in quarterly comparable store sales—down 4% compared to the forecasted 12%. This resilience is attributed to increased demand from the UK government, which has asserted that Burberry should be exempt from any tariffs imposed by former President Donald Trump on US exports.

“You also saw the President talk a lot about the US's trade deficits in manufactured goods…we don't have that deficit with us. So if that's the logic of that position, well, I think we've got an argument to engage” – UK Business Secretary Jonathan Reynolds (03:10-03:30).

Reynolds emphasizes the UK's strong services-based economy, contrasting it with the US's manufacturing deficits, thereby justifying Burberry’s position against potential tariffs.

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Sustainable Rice Production and Climate Change

Impact of Climate Change on Rice Production

Ruth Alexander from the BBC's The Food Chain discusses the dual role of rice in both sustenance and its environmental footprint. Rice is essential for over half the global population but is also a significant contributor to greenhouse gas emissions, primarily methane, due to traditional paddy field cultivation.

“Rice is vulnerable to drought and flooding, which impacts harvests and prices. It's also responsible, by some estimates, for 10% of the greenhouse gas emissions that come from agriculture” (03:51).

Innovative Sustainable Practices by Tilde

Jean Philippe Laborde from Tilde, a UK brand under Ebro Foods, shares insights into the company's efforts to mitigate these environmental impacts through a new production technique called alternate wetting and drying (AWD), developed by the International Rice Research Institute in the Philippines.

“They have improved their farm yield by 7%. We could reduce the water by 27%, the electricity by 28%, and also fertilizers by 25%. So it's not just increasing the revenue with a higher cost, it's increasing revenue with a lower cost” – Jean Philippe Laborde (05:37).

This method reduces the frequency of field flooding from 25 times to 20 times before harvest, significantly lowering water and energy consumption, fertilizer use, and methane emissions by 45%.

Adoption and Future Prospects

While half of Tilde’s Basmati rice now benefits from AWD, broader adoption faces challenges such as convincing farmers to alter longstanding practices and geographical suitability. However, the company's commitment to expanding this method across all its rice production within three years showcases a promising shift towards sustainable agriculture.

“It paid off…and methane emissions were reported to be reduced by 45%. Jean Philippe thinks they could do even better in time with that too” (05:55-06:14).

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Conclusion

The episode of Marketplace Morning Report offers a comprehensive overview of Japan's significant monetary policy change and its ripple effects on the global economy, the resilient performance of British companies amidst trade uncertainties, and innovative strides in sustainable agriculture to combat climate change. By featuring expert insights and real-world examples, the report provides listeners with a nuanced understanding of these complex economic and environmental issues.

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Key Takeaways

1. Japan’s Monetary Shift: The Bank of Japan's rate hike to 0.5% marks a pivotal move towards normalizing monetary policy after decades of minimal inflation efforts.
2. Economic Implications: While beneficial for the economy, higher rates present challenges for borrowers, although future rate hikes are approached with caution to avoid market disruptions.
3. Global Currency Dynamics: The strengthening of the Japanese yen against the dollar underscores investor confidence in Japan’s economic strategies.
4. Trade Relations: Burberry’s stable sales amidst potential US tariffs highlight the nuanced dynamics of UK-US trade relations and the importance of service-based economies.
5. Sustainable Agriculture: Tilde’s adoption of alternate wetting and drying in rice production exemplifies successful sustainable practices that benefit both the environment and farmers financially.

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By providing detailed analysis and expert commentary, this episode equips listeners with valuable insights into current economic trends and sustainability initiatives shaping the global landscape.

Transcript

[Emily]

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[Sarah Rogers]

[e-mail] Japan's interest rates hit their highest level for 17 years. Live from the UK, this is the Marketplace Morning Report from the BBC World Service. In for Leanna Byrne. I'm Sarah Rogers. Good morning. First to Japan, where the central bank has raised interest rates to 0.5%. So what does it mean for the world's fourth largest economy? The BBC's Mariko Oy is looking at this. Hi, Mariko.

[Mariko Oi]

Hello.

[Sarah Rogers]

So, a very different picture to what we're seeing in other major economies. Can you just explain a little bit what's happened in Japan?

[Mariko Oi]

Basically, Japan has had falling prices, known as deflation or very, very little inflation, for decades. So back in 1999, the bank of Japan became the world's first central bank to cut interest rates to zero, basically trying to encourage spending and investment, but that didn't really work. So they went further in 2016 by cutting rates to below zero to minus 0.1%. But Japan is finally starting to see prices rise, partly because of higher food and fuel prices started by the war in Ukraine. But because of that, the bank of Japan exited that negative interest rates policy in July. They raised it to 0.25%. But at the time, at the start of August, the. That really caused a massive sell off in the stock market, especially in Japan, but elsewhere as well. And as a result, officials have been a little bit more cautious. It's good news in terms of normalizing the monetary policy of Japan. Not so good news if you have a mortgage.

[Sarah Rogers]

So bad for borrowers, but potentially good news for the economy. Is there a worry, though, that rates might rise too quickly?

[Mariko Oi]

I don't think we'll see any major market reaction this time around. And in terms of further rate hikes, I think a lot of economists are expecting more to come, but. But they have been so cautious after that sell off. I think they've learned their lesson and they'll probably try their best to avoid that.

[Sarah Rogers]

The BBC's Mariko Oi, thank you for joining us on Marketplace.

[Mariko Oi]

Thank you.

[Sarah Rogers]

Let's do the numbers. Well, the Japanese yen has strengthened off the back of that interest rate rise up around 2.10of a percent on the dollar. And British fashion house Burberry reported a shallower than expected drop in quarterly comparable store sales, 4% against a prediction of 12%. Following an uptick in demand from the now, the UK government has said it should be excluded from any tariffs Donald Trump imposes on exports to America. The country's business secretary, Jonathan Reynolds, was responding to the US President's address at the World Economic Forum in Davos.

[Jonathan Reynolds]

You also saw the President talk a lot about the US's trade deficits in manufactured goods. And we know this is something not just President Trump, but the whole of his administration takes very seriously. That isn't something the US has with the uk, we obviously more of a services based economy, but we don't have that, does not have that deficit with us. So if that's the logic of that position, well, I think we've got an.

[Sarah Rogers]

Argument to engage with UK Business Secretary Jonathan Reynolds. Now, rice. It's a staple food for more than half of the world's population, but is affected by and a contributor to climate change. Ruth Alexander from the BBC's the Food Chain joins us on Marketplace. And you've been talking to one company that's been trialling a new way to make production more sustainable.

[Ruth Alexander]

Hi, Sarah. Yet rice is vulnerable to drought and flooding, which impacts harvests and prices. It's also responsible for, by some estimates, 10% of the greenhouse gas emissions that come from agriculture. That's because most production in South Asia and Southeast Asia is done in paddy fields underwater. And that flooding creates a low oxygen environment where microorganisms thrive, producing large amounts of methane. This sustainability issue is a financial problem for producers. As Jean Philippe Laborde from UK brand Tilde, owned by one of the biggest producers, Spanish company Ebro Foods, has been.

[Jean Philippe Laborde]

Telling me Basmati rice can come from two countries, India and Pakistan. So whenever there is a major incident on the climate change like we had a couple of years ago with a massive flood in Pakistan, for example, they had 30% less on their production for the Basmati rice. So sometimes the climate change can impact quite seriously.

[Ruth Alexander]

To reduce water use and methane production, the company's been trialling a new production technique called alternate wetting and drying developed by the International Rice Research Institute in the Philippines.

[Sarah Rogers]

So the aim is to make rice production more sustainable. But how does it all actually work?

[Ruth Alexander]

It's rather simple. The farmer just puts a plastic water measuring pipe with a sealed base into the ground in the field and checks it periodically to see how much water there is in there. When the water level gets low, the farmer knows it's time to flood the field.

[Sarah Rogers]

So how is this different then to how rice was produced before?

[Ruth Alexander]

Well, traditionally you flood a rice field on average 25 times before harvest. When Jean Philippe's company gave it a go, they got that down to 20. And he says the 1600 farmers who took part in the trial found it paid off.

[Jean Philippe Laborde]

They have improved their farm yield by 7%. We could reduce the water by 27%, the electricity by 28%, and also fertilizers by 25%. So it's not just increasing the revenue with a higher cost, it's increasing revenue with a lower cost.

[Sarah Rogers]

So this way is proving to be better for the farmers financially as well then?

[Ruth Alexander]

Yes. And environmental benefits were apparent too. Less water and fertiliser was used, as Jean Philippe said, and methane emissions were reported to be reduced by 45%. Jean Philippe thinks they could do even better in time with that too.

[Sarah Rogers]

So this all started as part of a trial. Will it catch on? How widespread is this way of rice production now?

[Ruth Alexander]

Well, half this company's Basmati rice is produced in this way and the plan is that all of it will be in three years time. However, more generally take up is growing in certain regions, but still not widespread. A challenge is to convince farmers to change what they've done for generation. Jean Philippe's company did that by paying them extra. And also not all areas are suitable as it's best done on the flat.

[Sarah Rogers]

The BBC's Ruth Alexander. Thank you for joining me on Marketplace.

[Ruth Alexander]

Thanks, Sarah.

[Sarah Rogers]

In the uk, I'm Sarah Rogers with the Marketplace Morning Report from the BBC World Service.

[Emily]

Hi, this is Emily from Paxton, Nebraska. I live in a rural area where the written local news has been outsourced to a bigger city and the local newscast is not very good. I enjoy listening to Marketplace programs because they are informative and thought provoking. I learn about things, places and people that I would not have found anywhere else. I am so grateful for Marketplace's dedication to bringing the news to the people. Join me in supporting Marketplace with a gift today. Go to marketplace.org donate and thank you.