Bank of Japan Official Advocates Maintaining Ultra-Low Policy Rates, Stresses Stringent Exit Criteria

09 Sep, 2023

Bank of Japan Official Advocates Maintaining Ultra-Low Policy Rates, Stresses Stringent Exit Criteria

A Bank of Japan policymaker, Junko Nakagawa, emphasized the importance of maintaining an extremely accommodative monetary policy and imposing rigorous criteria for ending negative interest rates. This suggests that the central bank is in no hurry to phase out its extensive stimulus program.

Nakagawa pointed out that an increasing number of Japanese companies were raising prices and wages, potentially leading to a faster-than-expected acceleration in inflation. However, she also noted the risk of inflation slowing down once the initial impact of higher costs diminishes.

She stated, "There are both upside and downside risks to the inflation outlook," as prices are influenced by various factors, including business sentiment and consumer spending.

Nakagawa acknowledged some positive developments in Japan's economy, such as changes in corporate pricing and wage-setting behavior. Still, she cautioned that Japan had not yet achieved its 2% inflation target in a stable and sustainable manner.

These remarks align Nakagawa with those on the central bank's board who are cautious about winding down stimulus measures. The Bank of Japan defines sustainable inflation as not solely driven by rising raw material costs but also supported by strong domestic demand and ongoing wage increases.

Despite inflation exceeding the 2% target for more than a year, there is uncertainty about the timing and sequence of the central bank's exit from its current yield curve control (YCC) policy, which guides short-term interest rates and sets a cap on the 10-year government bond yield.

Nakagawa stated, "We cannot specify the exact order, timing, and interval for ending YCC." However, she outlined the conditions for ending negative interest rates, emphasizing the need for a robust economy, sustained demand, and households' confidence in rising incomes.

Japan's core inflation reached a four-decade high of 4.2% in January and remained above the 2% target for 16 consecutive months in July. Despite this, Governor Kazuo Ueda emphasized the importance of maintaining ultra-low interest rates patiently to achieve 2% inflation through solid domestic demand and wage growth.

Nakagawa made these remarks during a news conference held after meeting with business leaders in Kochi, a city in western Japan.