It has been more than five months since interest rates were increased in Japan after decades. Within this period inflation averaged around 2.7% compared to 2.5% previous three months. The impact of it on retail sales has been negligible for now. Over 90% of companies increased wages this year. The increased average was near 13500 yen up by 75% compared to last year.
The financial markets have given a mixed response as the equity markets remained stable while 10 years at bond yield increased from 0.75% to 1%. The most watched asset was currency as Yen depreciated by 13% despite large interventions. During this period the forex reserves fell from $1.29 trillion to $1.23 trillion.
The banking industry has seen the first waves of issues, especially in two aspects. First, regional banks are losing deposits to large national banks as it is hard for them to increase the deposit rates quickly. Second, holding local bonds are resulting losses that have to be compensated by selling large foreign bond holdings.
All these are indications of initial adjustment but if the inflation momentum forces the Bank of Japan to respond much more quickly than anticipated then the growth rate and financial stability could be at risk.
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