Bank of Japan Governor Kazuo Ueda and his deputy indicated there is scope for gradually raising interest rates now that the nation has shifted away from an inflation norm of 0 per cent.
“While we still have a big challenge to anchor the inflation expectations to 2 per cent, the end of our battle is in sight,” Deputy Governor Shinichi Uchida said in a speech at the BOJ’s annual international conference on Monday (May 27), referring to the central bank’s mission to overcome deflation.
Earlier Ueda pledged that the bank “will proceed cautiously” after making progress in moving away from zero-inflation expectations. The governor’s opening comments at the conference also touched on the need to avoid interest rates losing their effectiveness by getting too low.
The remarks by the BOJ’s two most important policymakers underscore the central bank’s recent focus on adjusting the level of stimulus as the price trend improves instead of changing deflationary behaviour via massive monetary easing.
Japan’s inflation stayed at or above BOJ’s inflation target for a 25th month through April. With the BOJ’s benchmark rate at 0 to 0.1 per cent, the bank is widely expected to raise rates later this year.
Speaking separately on Bloomberg TV, former BOJ board member Takako Masai said the bank has room to raise rates to 0.5 per cent this year, provided economic conditions stay on track.
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Uchida outlined changes in behaviour that indicate consumers and companies are no longer expecting prices to remain static. More firms now believe they can raise prices without losing customers, he said. Among other norms that are changing, workers are increasingly less likely to accept lower wage increases in exchange for job security, he said.
Uchida said that after previous occasions over the last quarter century when there were hopes for an end to deflation in Japan that wound up coming to nothing, “this time is different.”
While the comments suggest the BOJ is laying the ground for further interest rate hikes, Ueda cautioned that after such a long period without major changes in rates in Japan, it was difficult to assess the impact on the economy and what a neutral interest rate might be.
The challenge ahead was the need to anchor inflation expectations at 2 per cent, he said.
John Taylor, originator of the Taylor rule, was invited to be a keynote speaker at the conference. The rule projects the interest rate level needed to stabilise the economy based on certain assumptions including minimum unemployment levels and growth potential.
Ueda has said the rule is “always” in the mind of central bankers while the result from the model varies depending on premises.
The Taylor rule is a popular measure of orthodox policymaking that BOJ watchers including Toshitaka Sekine, a former BOJ chief economist, cite as a key reason to expect higher rates. BLOOMBERG
