BoJ's Asada warns rate hikes could push down underlying inflation given consumption lacks momentum

Bank of Japan (BoJ) board member Toichiro Asada said on Thursday that the central bank must be mindful of risk rate hikes that could push down underlying inflation given consumption lacks momentum.

Key quotes

Must be mindful of risk rate hikes could push down underlying inflation given consumption lacks momentum, when asked whether further rate hike such as in December would be premature.

Central bank independence is an important framework to achieve price stability, when asked if BoJ rate hikes could affect government’s economic policy.

Don’t have specific idea in mind on terminal rate. My view is that Japan’s nominal neutral rate is in the lower side of boj staff’s estimated range.

Terminal rate and neutral rate are very closely intertwined.

BoJ does not directly control FX, so won’t comment on what desirable level of dollar/yen could be.

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BoJ’s Asada flags cautious path for future rate hikes and limited FX focus

BoJ’s Asada scores 4.2/10 on FXS Speechtracker, modestly above the historic 3.7/10 baseline, signaling a slightly more impactful but still cautious stance. The emphasis on being mindful that rate hikes could dampen underlying inflation amid weak consumption leans dovish, suggesting limited appetite for an early follow-up move, such as a December hike.

Asada’s comments that Japan’s nominal neutral rate is on the lower side of BoJ staff estimates, and that the terminal and neutral rates are closely intertwined, reinforce a view that the eventual peak in rates will be relatively low. The refusal to discuss a desirable DOLLAR/YEN level and the stress on central bank independence underline that BoJ policy will stay focused on domestic price stability rather than FX targeting, which should temper expectations for aggressive tightening as a tool to support the YEN.

Market reaction

At press time, the USD/JPY pair trades 0.09% lower at around 159.72.

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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