BoJ Minutes note rising downside risks for Japan's economy, rates must be kept low
The Bank of Japan (BoJ) board members shared their views on the monetary policy outlook on Friday, per the BoJ Minutes of the May meeting.
Key quotes
Many members said must carefully scrutinise each nation’s trade policy and its development given heightening downside risks to economy, prices.
A few members said BOJ must maintain current very low real interest rates to underpin economy.
One member said BOJ had no choice but to wait-and-see until US trade developments stabilised.
One member said must scrutinise whether recent tariff developments could prod Japan firms to embark on excessive cost-cuts, curb wage and investment.
Members agreed it was appropriate for BoJ to continue raising interest rates in accordance with improvements in economy, prices if BOJ’s forecasts materialise.
A few members said it was appropriate to continue raising interest rates as BOJ’s projections point to achievement of its 2% inflation target.
One member said likelihood of Japan’s underlying prices falling back again is small.
One member said BOJ may pause rate hike temporarily, but must stand ready to hike rates again depending on U.S. policy shifts.
Market reaction to the BoJ Minutes
At the time of writing, USD/JPY was down 0.12% on the day at 145.25.
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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