Central Bank Comparison: Germany and Japan

By: Peter Ort, The Quinnipiac University Economics Research Team

Photo by: Kai Pilger on Unsplash

The Bank of Japan currently reports a 0.75% bank rate (interest rate without risk premium) with a CPI inflation rate of 2%, which is at its inflation target of 2%. Market observers generally expect bank rates to hit %1 in March or April.

Although inflation may seem smooth sailing for Japan, inflation rates fluctuated from 1.5-2.6% in January, finally settling on 2%, not including food inflation. Japan has a surprisingly high food inflation rate of 3.9%, which fell from 5.1% in December. It counts food inflation out of overall CPI calculations due to its high volatility and seasonality. Japan considers it a staunch targeter of inflation, and its central bank additionally focuses on keeping income distribution stable.

The European Central Bank (ECB) currently reports a 2% deposit facility rate (primary interest rate of the ECB) and a CPI inflation rate for Germany of 1.9%, along with an inflation target for the Eurozone of 2%.

Despite the ECB, Germany does have its own central bank, the Deutsche Bundesbank, which primarily conducts open market operations. However, it isn’t very independent, as its monetary policy must go through the ECB Governing council before enacting anything. Different from the Bank of Japan, the ECB’s 2% inflation target derives instead from anchoring inflation/price expectations. On a macroeconomic scale, price expectations can spiral very quickly and affect aggregate supply, causing GDP and inflation that is hard to come back from.

Both Japan and Germany are great to compare together as they are both countries with historically large trade surpluses, inflation targeting, and they stand next to each other on the global ranks of nominal GDP (Germany 3^rd, Japan 4^th). Despite this, Japan has handled its debt much differently than Germany, consistently running deficits due to an aging population with an expensive social security system, with their debt equal to around 250% of their GDP. On the other hand, Germany has just 66% of its debt to GDP due to strict fiscal policy, where the government mainly spends through tax income rather than borrowings.

Quality fiscal policy and monetary policy are needed to manage run large and far-reaching economies like Germany’s and Japan’s. While Germany rebounded from energy problems and inflation with Russia in 2023, Japan is still struggling to arrive at positive interest rates as their economy has completely plateaued in the past two decades.

Sources:

https://www.boj.or.jp/en/

https://www.ecb.europa.eu/stats/policy_and_exchange_rates/key_ecb_interest_rates/html/index.en.html

https://www.bundesbank.de/en

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