BoJ’s Tamura: Even if BoJ raises policy rate further, monetary conditions will remain accommodative

Key quotes

Personally feel Japan's recent inflation is becoming sticky.

We may be able to judge that BoJ's price goal has been achieved as early as this spring.

We are in a phase where we need to scrutinise various data to determine whether Japan can make a smooth landing towards achieving price target.

Consumer inflation stabilising but must be vigilant to price outlook given renewed yen downtrend.

Expect food prices to continue rising.

Japan's output gap is already in positive territory, lack of supply capacity putting upward pressure on prices.

Expect wage growth to achieve levels consistent with 2% price target this year.

Expect BoJ to continue raising interest rate in line with improvements in economy, prices.

Underlying inflation rising gradually, very close to becoming embedded around that level,

Last remaining piece for me in determining whether BoJ's price goal is met is whether inflation is becoming embedded around that level.

I think there is good chance we can determine by around spring this year that inflation has become embedded around 2%.

My view is that impact of past interest rate hikes on Japan's economy has been very limited.

There is still quite some distance before interest rates reach level deemed neutral to economy.

Even if BoJ raises policy rate further, monetary conditions will remain accommodative.

Once BoJ’s policy rate exceeds 1%, stimulus effect of its policy will gradually weaken.

I have been saying Japan's neutral rate is at least around 1%, though must be mindful there is divergence in the estimate depending on how you measure it.

Market reaction

At the press time, the USD/JPY pair is up 0.16% on the day to trade at 152.94.

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.