Economy

BOJ Policymaker Advocates Caution in Rate Hike Strategy, Reports Reuters

By Leika Kihara

KANAZAWA, Japan – A Bank of Japan board member, Hajime Takata, emphasized on Thursday the necessity of maintaining a cautious approach to further interest rate hikes to avoid adversely impacting businesses amid volatile market conditions.

Takata indicated that the central bank plans to implement rate increases in multiple stages, contingent upon economic and price developments aligning with its forecasts, a sentiment shared by Governor Kazuo Ueda last month.

He cautioned, however, that these hikes will be contingent on market stability, emphasizing the importance of ensuring that fluctuating markets do not deter companies from increasing spending and wages.

"Our fundamental position is to adjust monetary support levels if our economic and price projections are met," Takata stated during a news conference, reaffirming the Bank’s long-term intention to raise interest rates. "Yet, this position is not absolute. We need to take into account any market developments that could pose risks to the economy."

He further mentioned that the Bank has no predefined roadmap regarding the pace and magnitude of rate increases and signaled the importance of carefully assessing economic and market developments over time.

Takata highlighted recent significant volatility in stock and currency markets and noted that the effects of an August sell-off are still being felt. Consequently, he stated that the Bank must closely monitor market trends and their implications in the near term.

INFLATION ALSO A RISK

Global market volatility has intensified amid increasing anxiety about the U.S. economic outlook. Japan’s stock market recently experienced a notable drop, underscoring the impact of these global trends.

Reflecting on the August sell-off, Deputy Governor Shinichi Uchida reiterated that the Bank will not raise rates during periods of market instability.

In a significant move towards ending an extensive period of monetary easing, the Bank of Japan abandoned negative interest rates in March and raised short-term rates to 0.25% in July, believing the economy is progressing towards achieving its 2% inflation target sustainably.

Governor Ueda has indicated that the bank is prepared to increase rates further if inflation remains near 2% in the coming years, paired with strong wage growth, as currently projected.

This intention to continue raising rates comes at a time when numerous other central banks are starting to ease their policies following a vigorous tightening phase to combat rampant inflation.

Takata noted that the differing monetary policy strategies between the Bank of Japan and other central banks could lead to market turbulence, highlighting the importance of closely monitoring both domestic and international developments for now.

Additionally, he warned of the potential for inflation to overshoot as companies exhibit a greater tendency to pass on rising costs through price increases.

"We must carefully analyze, without any preconceived notions, the possibility of Japan experiencing another wave of price hikes in the latter half of the current fiscal year," he said.

Recent data indicated that Japan’s inflation-adjusted wages rose for two consecutive months in July, reinforcing the Bank’s belief that increasing pay levels will support consumption and allow companies to continue raising prices.

Takata provided limited insights regarding his view on Japan’s neutral interest rate—an important benchmark for assessing how far the Bank might eventually raise rates.

He concluded, "We shouldn’t approach policy rate increases with a specific neutral rate in mind, as determining its precise level is challenging."

A former bond strategist, Takata has supported the Bank’s policy adjustments and is generally perceived in the market as neutral to slightly hawkish concerning monetary policy.

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