BoJ’s Himino: Japan real interest rate still very low

Key quotes

Raise rates if economic outlook is met.

Despite three policy interest rate hikes by the bank so far, real interest rates have remained at significantly low levels as inflation has stayed.

Japan real interest rate still very low.

Appropriate to continue raising interest rates in accordance to improvements in economy prices.

Risks on both sides for prices, economy.

Without any preconceptions, we will continue to monitor the economy closely tosee if the baseline scenario unfolds as expected.

Want to scrutinise without preset idea whether our baseline projections materialise.

Must continually assess balance of risks, both upside and downside, and respond in a timely and appropriate manner.

Our baseline scenario is for Japan corporate profits to come under pressure from global slowdown, impact of trade policy

Chance trade policy impact could be smaller or bigger than expected, must focus on possibility it could be bigger than expected.

Market sentiment has now largely returned to state seen before volatile phase in April, close monitoring of financial markets is still warranted.

Monetary easing, tightening should primarily be conducted by adjustment to short-term policy rate, not by adjustment of BOJ's JGB buying.

Market reaction

At the time of press, the USD/JPY pair was up 0.22% on the day at 147.50.

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.

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