BoJ's Koeda urges timely rate adjustments based on economic and price conditions
Bank of Japan Board Member Junko Koeda said on Thursday that attention focused on price upside risks from Japanese Yen (JPY) depreciation, robust global AI demand, and the Middle East situation impact. Koeda added that the BoJ should adjust the policy rate timely, considering economic and price conditions, keeping estimated neutral rate range in mind.
Key quotes
Attention focused on price upside risks from yen depreciation and robust global AI demand, plus Middle East situation impact.
Looking ahead, it will be necessary to focus on both AI-related exports and imports.
Monetary policy debate includes if AI backs investment to address labor shortages and boost productivity.
Important to assess how policy rate change influences financial conditions, economic activity and prices.
Overall, I believe Japan's financial conditions have stayed accommodative.
Recent rate hikes not necessarily expected to curb overall consumption of working generation.
Still want to study accumulated effect of policy rate increases on household behavior.
Companies' financing conditions have generally stayed favorable.
Neutral interest rate level is well above 1 percent, near lower bound of estimated range.
Impact on long-term interest rates of changes in central bank government bond holdings may be smaller during reduction phase than active expansion phase
Underlying inflation has been about 2% over the past year or so.
Sustained price rises across various CPI items, change in price distribution indicates underlying inflation anchoring around 2%.
Sustained inflation appears to be taking stronger hold in Japan as wages have also risen steadily.
Central bank should adjust policy rate timely considering economic and price conditions, keeping estimated neutral rate range in mind.
With significant upside risks to prices and ongoing loose financial conditions, BOJ should not be too cautious about raising policy interest rates.
It is crucial for BOJ to continue calmly with normalization of its balance sheet.
Market reaction
At the time of writing, the USD/JPY pair is down 0.45% on the day at 157.60.
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.
Author
Lallalit Srijandorn
FXStreet
Lallalit Srijandorn is a Parisian at heart. She has lived in France since 2019 and now becomes a digital entrepreneur based in Paris and Bangkok.
