The Bank of Japan (BoJ) board member Naoki Tamura on Thursday suggested a gradual rate hike in a timely manner. Tamura added that the central bank to raise rates to approximately 1% by the latter half of fiscal 2025.
Key quotes
Suggests gradual rate hike in a timely manner.
Worried about potential negative impact of high rice prices and prolonged inflation over 2% for almost three years on consumption.
A 0.75% rate would still be negative in real terms.
No preconception on impact of rate hike.
Supply constraints putting upward pressure on prices, output gap may already be positive.
Corporate and household inflation expectations increasing, reach approximately 2% levels.
Building upward price risks.
Expects interest rate to stay at 1% in second half of FY 2025.
Believes interest rates should be raised to achieve a nominal neutral level of at least 1%.
Personally don't think we can say BOJ's past massive monetary easing had a positive effect as a whole given strong side-effects.
Must scrutinise whether prolonged monetary easing could cause problems such as excessive yen falls and housing price spikes.
Market reaction
At the press time, the USD/JPY pair is down 0.49% on the day to trade at 151.94.
Bank of Japan FAQs
The Bank of Japan (BoJ) is the Japanese central bank, which sets monetary policy in the country. Its mandate is to issue banknotes and carry out currency and monetary control to ensure price stability, which means an inflation target of around 2%.
The Bank of Japan embarked in an ultra-loose monetary policy in 2013 in order to stimulate the economy and fuel inflation amid a low-inflationary environment. The bank’s policy is based on Quantitative and Qualitative Easing (QQE), or printing notes to buy assets such as government or corporate bonds to provide liquidity. In 2016, the bank doubled down on its strategy and further loosened policy by first introducing negative interest rates and then directly controlling the yield of its 10-year government bonds. In March 2024, the BoJ lifted interest rates, effectively retreating from the ultra-loose monetary policy stance.
The Bank’s massive stimulus caused the Yen to depreciate against its main currency peers. This process exacerbated in 2022 and 2023 due to an increasing policy divergence between the Bank of Japan and other main central banks, which opted to increase interest rates sharply to fight decades-high levels of inflation. The BoJ’s policy led to a widening differential with other currencies, dragging down the value of the Yen. This trend partly reversed in 2024, when the BoJ decided to abandon its ultra-loose policy stance.
A weaker Yen and the spike in global energy prices led to an increase in Japanese inflation, which exceeded the BoJ’s 2% target. The prospect of rising salaries in the country – a key element fuelling inflation – also contributed to the move.
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