BoJ’s Takata: Central bank must conduct further rate hikes in gradual manner

Key quotes

Overseas economies have grown moderately overall, although some weakness has been observed in part.

Fear of Japan's economy reverting to deflation has been dispelled.

I believe it is necessary to move the BoJ's focus more to upswings in prices

A sharp economic slowdown caused by credit contraction, which was common during past economic downturns in the United States, is unlikely.

Even after December rate hike, real short-term interest rates remain significantly negative in Japan.

Must carefully monitor risk divergence of monetary policy stances between Japan and abroad could bring about high volatility in financial markets, particularly FX

BoJ must conduct further rate hikes in gradual manner.

Believe it is necessary to shift the focus more to upswings in prices given expectations that overseas economies will experience a major shift to recovery.

Bank of Japan is at a phase where it should deliberate on reducing the size of the balance sheet.

BoJ should take time and be prudent in reducing its Japanese Government Bond purchases.

My expectation is that Japan will see a true dawn this time around; in other words, this time is different.

We will see a situation that transcends the former norm that wages and prices do not rise easily.

During process of normalizing monetary policy, it is desirable for BoJ to avoid causing market volatility that significantly exceeds risk premium demanded by market participants.

A path toward an exit from the deflationary equilibrium has finally taken shape.

If such volatility were to occur, there is risk of the Japanese Government Bond market experiencing a deterioration in functioning or becoming dysfunctional, which would necessitate an appropriate response.

Given weakening investment demand for super-long-term JGBs, BoJ must carefully examine market situation when it conducts interim assessment of its taper plan in June.

Broad recognition that Japan's economy is already no longer in deflation also appears to be fostering a common understanding that the price stability target is almost achieved.

Since supply and demand conditions for super-long-term Japanese government bonds in particular are expected to remain of concern, BoJ must closely monitor developments in long-term interest rates and communicate effectively with the market.

In exceptional circumstances, Bank of Japan may need to consider a flexible response, including purchases of Japanese government bonds.

Market reaction

As of writing, USD/JPY is trading 0.35% lower on the day at 155.90.

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 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.

How do Bank of Japan’s decisions influence the Japanese Yen?

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.

Why did the Bank of Japan decide to start unwinding its ultra-loose policy?

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.