Banks boom and shoppers scrimp a year after Japan's interest rate pivot

One year on from Japan's historic rate hike, profits at its biggest banks are soaring to records, while price rises are forcing consumers to cut back and higher borrowing costs are fuelling a political battle over how the government can rein in its outlays.

- 

TOKYO -

Bank of Japan (BOJ) governor Kazuo Ueda scrapped the world's last negative interest rate and its massive stimulus programme a year ago, encouraged by record gains in annual wage deals. Those pay increases suggested consumers were in a position to help drive prices and growth, supporting the inflation trend.

The bank's first rate hike in 17 years was followed by two more in the space of months, the swiftest pace since 1989, when it was at the peak of a "bubble economy" that burst shortly afterward. Economists expect the BOJ to hold its fire this week before raising rates again, most likely in July.

The BOJ has long argued that generating a lasting cycle of rising wages, consumption and growth is worth the pain of adjusting to life with higher prices. Economists and policymakers see increasing signs of that cycle taking hold, but consumers struggling with steeper food bills are less convinced.

"Prices are still rising much faster than my pay," said 50-year-old office worker Masashi Fujii, who is married with two children. "And the effect of higher interest rates on my savings is completely nonexistent."

Persistent inflation is helping accelerate change in Japan. Companies are more willing to pass on rising costs to customers. Expectations of a more expensive future are encouraging a growing cohort of retail investors to look for new ways to fund their retirement rather than relying on increasingly meagre pensions.

For now, the biggest winners are the banks. Loan rates are set to help all three mega banks achieve record profits in the financial year to March, after they pared costs in leaner times.