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BoJ’s Masu: Central bank needs to proceed with further rate hikes to complete policy normalisation

Bank of Japan (BoJ) policy board member Kazuyuki Masu said on Friday that Japan has shifted into inflation as policy normalization continues.

Key quotes

Must be vigilant as inflation driven by weak yen pushes up overall prices and affects underlying inflation.

BOJ is closely monitoring FX market moves and their impact on economy and prices.

BOJ expected to continue increasing interest rates if economic and price forecasts materialize.

Underlying inflation remains below 2 percent but approaches that level considerably.

It is clear deflationary customs are being eradicated as Japan enters a period of inflation.

What is important is to raise rates in timely and appropriate fashion to ensure underlying inflation does not exceed 2%.

BOJ must also move cautiously to avoid excessive rate hikes destroying cycle of moderate rises in inflation and wages that is just starting to roll.

BOJ must scrutinize market developments while examining future pace of its bond buying.

I am personally focusing on how prices of processed food excluding rice would move since that would be key to Japan's inflation outlook.

We also need to look carefully at whether Japan inflation is driven only by supply factors or by a combination of supply and demand factors.

Japan's real interest rate remains deeply negative.

Neutral rate estimate is only one reference in setting monetary policy.

As BOJ's policy rate nears estimated range of neutral, BOJ must more thoroughly examine price, jobs, financial market conditions.

BOJ needs to proceed with further rate hikes to complete policy normalization.

Market reaction

As of writing, the USD/JPY pair is down 0.28% on the day at 156.60.

Japanese Yen FAQs

The Japanese Yen (JPY) is one of the world’s most traded currencies. Its value is broadly determined by the performance of the Japanese economy, but more specifically by the Bank of Japan’s policy, the differential between Japanese and US bond yields, or risk sentiment among traders, among other factors.

One of the Bank of Japan’s mandates is currency control, so its moves are key for the Yen. The BoJ has directly intervened in currency markets sometimes, generally to lower the value of the Yen, although it refrains from doing it often due to political concerns of its main trading partners. The BoJ ultra-loose monetary policy between 2013 and 2024 caused the Yen to depreciate against its main currency peers due to an increasing policy divergence between the Bank of Japan and other main central banks. More recently, the gradually unwinding of this ultra-loose policy has given some support to the Yen.

Over the last decade, the BoJ’s stance of sticking to ultra-loose monetary policy has led to a widening policy divergence with other central banks, particularly with the US Federal Reserve. This supported a widening of the differential between the 10-year US and Japanese bonds, which favored the US Dollar against the Japanese Yen. The BoJ decision in 2024 to gradually abandon the ultra-loose policy, coupled with interest-rate cuts in other major central banks, is narrowing this differential.

The Japanese Yen is often seen as a safe-haven investment. This means that in times of market stress, investors are more likely to put their money in the Japanese currency due to its supposed reliability and stability. Turbulent times are likely to strengthen the Yen’s value against other currencies seen as more risky to invest in.

Author

Lallalit Srijandorn

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.

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