BoJ’s Himino says policy should gradually move toward neutral stance with moderate rate hikes

Key quotes

BoJ's goal is to maintain price stability by avoiding both excessive inflation and deflation, thereby keeping the economy on a sustainable growth path.

If our estimates are correct, we can infer that the Japanese economy is neither overheating nor stagnating.

Impact of past rate hikes on the economy is limited.

We need to look at market moves carefully however being swayed too much by market moves could put us under attack from speculators.

Many people in Japan still do not believe the economy is especially strong at this point.

Responding to inflation driven by supply shocks could disrupt GDP.

When addressing temporary supply shocks, it is possible that the effects of the shocks may have already dissipated by the time the policy measures take effect.

It is therefore more prudent to confirm underlying inflation when responding to supply shocks.

Inflation gap remains slightly negative currently but is expected to approach zero in the future.

BOJ policy remains somewhat accommodative but should gradually shift to a more neutral stance through moderate policy rate hikes.

Market reaction

At the time of press, the USD/JPY pair was up 0.05% on the day at 156.25.

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.