BoJ's Tamura says central bank should raise rates near neutral as inflation risks overshooting
Bank of Japan (BoJ) board member Naoki Tamura said on Thursday that Japan has already achieved the Bank of Japan’s (BoJ) 2% inflation target and the central bank must raise rates near neutral to avoid underlying inflation from overshooting above target.
Key quotes
Japan has already achieved BoJ's 2% inflation target, must raise rates near neutral to avoid underlying inflation from overshooting above target.
BoJ needs to gauge where neutral rate lies by assessing how each rate hike affects economy, prices and financial developments.
Important for FX rates to move in way reflecting fundamentals.
FX rates move not just by policy stance of central banks but other factors.
FX moves are important factor affecting Japan's economy, prices.
FX moves have a bigger impact on inflation than in the past due to change in corporate price-setting behaviour.
If risk of inflation overshoot materialises, we may need to accelerate pace of rate hikes, when asked about chance of consecutive rate hikes.
Whether BoJ raises rates once every 3 months or 4 months would depend on how economy, prices and markets respond to each rate hike.
Will be focusing on how wholesale inflation spike affects CPI, moves in service-sector prices, inflation expectations as well as corporate view on financial conditions, in gauging next rate hike timing.
Won't comment on desirable fiscal policy but will consider how best to achieve price stability taking into account impact of fiscal policy on economy, inflation.
Market reaction
At press time, the USD/JPY pair trades 0.02% lower at around 161.75.
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.
