BoJ’s Tamura: Central bank should push rates closer toward levels deemed neutral
The Bank of Japan (BoJ) board member Naoki Tamura said on Thursday that the central bank should push the interest rates closer toward levels deemed neutral.
Key quotes
BOJ should push rates closer toward levels deemed neutral.
Growth rate of Japan’s economy is likely to rise, with overseas economies returning to a moderate growth path.
Don’t need to raise rates sharply, tighten monetary policy now when there are both upside, downside risks.
My view is that there is a strong possibility that the slowdown in overseas economies will not be as significant as initially expected.
Given upside price risks, BOJ should push up rates closer toward neutral to avoid being forced to hike rates sharply in the future.
Inflation may deviate upward from the baseline scenario
Inflation risk is mounting in Japan.
Many firms appear to be maintaining a proactive fixed investment stance.
Higher food prices should not be regarded as merely a temporary factor, and they require close monitoring.
Japan’s real interest rate remains in negative territory.
There is a significant risk that domestic price developments will deviate upward from the outlook presented in the July 2025 outlook.
Believe Japan’s neutral rate is at least 1%.
Believe that the policy interest rate is still far away from the neutral interest rate.
Hard to judge where neutral rate is, so BOJ has little choice but to gradually raise rates to find out where above 1% it actually lies.
It has become more likely that the price stability target will be achieved earlier than expected.
We are in a phase where we should decide raising rates to move it closer to neutral.
Market reaction
At the press time, the USD/JPY pair is up 0.03% on the day to trade at 151.09.
Bank of Japan FAQs
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%.
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.
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.
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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