Bank of Japan policymaker calls for ‘very moderate’ pace of rate hikes

TOKYO: The Bank of Japan must raise interest rates at a “very moderate” pace and avoid hiking prematurely, its policymaker Seiji Adachi said on Wednesday (Oct 16), warning that further yen rises and slowing global demand may weigh on inflation and wage growth.
Adachi said Japan’s economy has already met the conditions for normalising ultra-loose monetary policy, with the economy remaining on a firm note and price rises broadening.
But he warned of various economic uncertainties that required taking a cautious approach in raising interest rates.
The yen may keep rising from multi-decade lows as the US Federal Reserve enters a full-fledged rate cut cycle, which would push down Japanese import costs and weigh on consumer inflation, he said.
There is also uncertainty whether Japanese firms will keep raising wages next year due to lingering global risks such as uncertainty over the outcome of US presidential elections, as well as slowing Chinese and US demand.
“Given high uncertainty surrounding global developments, there is significant uncertainty over next year’s wage developments in Japan. We must carefully monitor the situation,” Adachi said in a speech, signalling the need to spend time scrutinising such risks before raising rates again.
The remarks by Adachi, a former economist seen as taking a neutral approach on monetary policy, follow those by Governor Kazuo Ueda suggesting the BOJ was in no rush to raise rates.
The BOJ ended negative interest rates in March and raised its short-term policy rate to 0.25 per cent in July on the view Japan was on track to stably meet the bank’s 2 per cent inflation target.
While most economists polled by Reuters expect the BOJ to raise rates again by March next year, a slim majority saw the central bank forgoing a hike this year.
Adachi said the BOJ should raise rates gradually and in several stages before inflation durably hits 2 per cent, to avoid being forced to hike sharply by waiting too long. But he added the BOJ must proceed cautiously to prevent a return to deflation.
“Until underlying inflation sustainably and stably achieves our 2 per cent target, we must basically maintain an accommodative financial environment and raise our policy rate at a very moderate pace,” he said.
The BOJ will eventually raise its policy rate to a level that neither cools nor overheats the economy, which is called the natural rate of interest.
The BOJ does not have an official estimate on Japan’s natural rate of interest. But it publishes as reference several academic estimates that put the natural rate of interest in a range of between -1 per cent to +0.5 per cent. Many analysts see the natural rate of interest as lying somewhere around 1 per cent.
“I believe we should avoid raising rates prematurely, so think we can use the most conservative estimate. Even so, our current, real policy rate is sufficiently below the natural rate of interest,” Adachi said. “This means an accommodative financial environment remains in place,” he said.