Bank of Japan’s Stance on Interest Rates

By Leika Kihara and Satoshi Sugiyama

(Reuters) – Bank of Japan Governor Kazuo Ueda reaffirmed his commitment to raising interest rates if inflation sustainably reaches the 2% target, although he cautioned that financial markets remain unstable.

Ueda indicated that the market volatility experienced in early August was fueled by heightened concerns over a potential U.S. recession, exacerbated by weak economic data. He noted that the BOJ’s decision to raise interest rates in July contributed to a significant reversal of the previously ‘one-sided yen falls’.

“Markets at home and abroad remain unstable, so we will be highly vigilant to market developments for the time being,” Ueda stated in parliament, responding to inquiries regarding the BOJ’s July decision to raise interest rates.

He emphasized that the BOJ will closely monitor how market volatility and its interest rate hike impact the economic outlook and inflation forecasts.

Despite the current situation, Ueda confirmed that there’s “no change to the BOJ’s basic stance to adjust the degree of monetary easing if it became convinced that economic and price developments were moving as forecast.”

These comments imply the BOJ may take longer than expected to deliberate its next rate hike, though it aims to gradually increase borrowing costs from the present ultra-low levels.

“Japan’s short-term rates are very low. If the economy is in good shape, they will move up to levels deemed neutral,” Ueda remarked, while acknowledging the “very high uncertainty” regarding the ultimate rising rates.

The BOJ ceased negative interest rates in March and elevated its short-term policy rate to 0.25% in July, marking a significant pivot from a decade-long radical stimulus approach.

In tightening policies in July, Ueda reiterated the intention of raising rates further if inflation remains on track to reach the 2% target in the coming years, as anticipated by the board.

The unexpected rate hike in July, accompanied by Ueda’s hawkish stance, caused a major market rout, compelling his deputy to provide dovish reassurances, indicating no hikes would proceed until market stability returned.

Ueda also mentioned that volatile yen movements could influence the BOJ’s median inflation forecasts, prompting the board to consider whether a policy shift would be necessary.

Even if yen fluctuations do not alter the BOJ’s median forecasts, they could still necessitate a change in policy should they pose significant risks to those projections.