BOJ to Raise Interest Rates When Economic Forecasts Strengthen, Says Deputy Governor Himino

BOJ Deputy Governor Himino Sets the Signal for Interest Rate Hike When Confidence Over This Forecasting Increases

BOJ deputy governor Ryozo Himino recently told a conference that it will be when the BOJ has more confidence in the forecast that it would consider raising interest rates.

In his address at a recent event, Himino said that the central bank is keeping an eye on inflation and other economic trends closely before arriving at a conclusion to modify its long-standing ultra-loose monetary policy.

Current BOJ Monetary Policy and Inflation

It has pursued ultralow interest rates as the antidote to chronic deflation and as a guide for economic growth for years now. The kind of policy is a norm of the BOJ in all directions it has pursued to fix the paralyzed Japanese economy, which for several decades has been known for low growth rates and weak inflation.

Maintaining interests at or below zero, the central bank seeks to raise lending and consumer spending as a way of stimulating more economic expansion.

Nevertheless, Japan’s inflation stubbornly lags the rest of the advanced economies. This year has brought upward pressure due to a combination of global supply chain disturbances, the energy price spikes, and the weaker yen, which has made imports dearer. Although it picked up a bit, it remains low, below the BOJ target.

Reiterating the idea that the BOJ’s core objective is to achieve sustainable inflation, Himino said that it was still too early to ascertain whether the spike in inflation would be sustained at these levels. He stated that the dynamics of inflation in Japan are different from others, as inflation in other countries gained momentum more strongly due to healthy demand growth. Japanese inflation is currently being driven by cost-push factors rather than robust demand.

 BOJ Rate Hike Conditions

Himino stressed that a decision to increase interest rates would be contingent on sounder economic prospects. Stronger evidence of sustainable inflation and growth should be enough for the BOJ to see the lessened need for the accommodative policy.

As Himino explained, there are three key elements the central bank will look at before acting:

1. 2+ % Stable Inflation: The BOJ wants to achieve inflation and thus remains relatively satisfied with seeing inflation running above the target, albeit primarily due to short-term factors like higher oil prices and supply-chain factors.

Instead, the BOJ wants to see stronger consumer demand and wage growth signs of a more sustainable economic recovery with stable inflation being driven.

2. Improving Economic Environment: The BOJ will also take into account the general environment of the economy. Japan’s economy has largely started to rebound from the Covid-19 pandemic, but it is still fragile and quite lopsided.

With a brighter prospect in a better economic environment, thanks to the more important impetus coming from domestic consumption as well as corporate investment, the BOJ will likely gain greater confidence to take the first step toward normalization of its monetary policy.

3. Global Risks: Himino said that the BOJ decision-making process will be influenced also by exogenous risks, which are resultant from geopolitical tensions and global economic conditions. As an export-dependent economy, Japan has external risks from trade disruptions or slowing of key trading partners, further reigning in Japan’s recovery.

 Challenges in the BOJ

Too early tightening risks stalling Japan’s still-fragile economic recovery. Now that inflation is rising, it is far from clear if it will persist in the long run. The BOJ does not want to commit the mistake of a historical repetition when premature efforts at tightening had just succeeded in suffocating economic growth.

Another determinant is a weak yen, which has depreciated to multi-year lows against the U.S. dollar. A weakness in the yen increases the inflation burden as costlier imports are added to the inflationary basket; this indirectly has the positive effect for exporters from Japan in having their goods cheaper in other markets.

The BOJ would then have to balance an export pick-up due to the weak yen against adverse effects on its consumers who have to pay more for their imported goods.

Future Outlook

Comments from Himino reveal that it appears BOJ is not in a hurry for normalization of the monetary policy. As inflation has just begun to perk up, the central bank seems a tad more interested in waiting for clearer evidence from this and sustainable inactions of inflation and economic growth before bringing a paradigmatic change in the policies.

For the time being, the BOJ appears to be sticking to its ultra-loose stance, though a rate hike may come within if inflation becomes more entrenched and the economic outlook improves.

Market watchers are following events in the economy of Japan as well as the next moves of the BOJ. As this would be a significant policy shift for Japan, which so far has been one of the last major economies to keep negative interest rates around, Himino says the central bank will tread carefully, only raising rates once it is more confident in its own forecasts and when conditions for sustainable growth are met.