Naoki Tamura, a board member of the Bank of Japan (BoJ), shared insights on the central bank’s interest rate policies in recent comments to Reuters on Wednesday.
Key Points:
- Short-term rates will be set based on economic, price, and financial developments.
- The exact magnitude of rate hikes by BoJ cannot be determined definitively at present.
- BoJ’s rate hikes are not expected to be as rapid as those by the US Federal Reserve.
- Appropriate monetary policies, including negative rates and Yield Curve Control (YCC), will be implemented if the economy weakens.
- The direction is towards reducing the amount of bond purchases, although the timing is uncertain.
- Rate hikes will not be pursued solely to restore market function.
- Future monetary policy guidance will consider factors like price levels, wages, consumption, and corporate pricing behavior.
- There is no fixed formula for additional rate hikes.
- Rate hikes may occur if there are increased risks to inflation or greater confidence in achieving price stability.
- The likelihood of a rapid tightening of monetary policy due to a significant inflation overshoot is low.
- Specific comments on FX movements were avoided, with stability reflecting economic fundamentals being preferred.
- Commitment to accommodative monetary policy may not conflict with the need to raise interest rates.
- If the positive economic cycle strengthens, there is a hope to raise interest rates to levels that support market function recovery.
Market Response:
USD/JPY is currently trading at 151.75, showing a 0.14% increase for the day.
BANK OF JAPAN FAQS
What is the Bank of Japan?
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%.
What has been the Bank of Japan’s policy?
The Bank of Japan has embarked in an ultra-loose monetary policy since 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.
How do Bank of Japan’s decisions influence the Japanese Yen?
The Bank’s massive stimulus has caused the Yen to depreciate against its main currency peers. This process has exacerbated more recently due to an increasing policy divergence between the Bank of Japan and other main central banks, which have opted to increase interest rates sharply to fight decades-high levels of inflation. The BoJ’s policy of holding down rates has led to a widening differential with other currencies, dragging down the value of the Yen.
Is the Bank of Japan’s ultra-loose policy likely to change soon?
A weaker Yen and the spike in global energy prices have led to an increase in Japanese inflation, which has exceeded the BoJ’s 2% target. Still, the Bank judges that the sustainable and stable achievement of the 2% target has not yet come in sight, so any sudden change in the current policy looks unlikely.