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Hawkish BOJ Policymaker Calls For Slow But Steady Interest Rate Hikes

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Naoki Tamura, a staunch member of the Bank of Japan’s board, stated that the bank should proceed “slowly but steadily” towards normalizing its extremely accommodative monetary policy, indicating the possibility of raising interest rates again if inflationary pressures increase. However, he also mentioned that the risk of the Bank of Japan being forced to tighten monetary policy significantly to tame excessive price hikes remains slim.

Tamura said at a press conference on Wednesday, “There is no specific formula regarding the conditions for raising interest rates again.” He added that the bank might consider raising interest rates if the likelihood of achieving the 2% inflation target increases significantly, or if inflation trends or the risks of price hikes escalate. Yen and Japanese government bond yields declined due to Tamura’s remarks, which were less clear and stringent than any clear hints about the timing of raising interest rates again.

Despite warning about some weak signs in consumption and capital spending, Tamura said that the Japanese economy is likely to continue recovering moderately, maintaining a positive cycle where wage increases lead to inflation rate rises. Tamura stated in a speech before the press conference, “From my perspective, the ultimate goal of the central bank is to return interest rates to levels that can be raised or lowered to adjust demand and influence price movements.”

The Bank of Japan ended eight years of negative interest rates and other remnants of its unconventional policy last week, marking a historic shift away from its focus on stimulating growth through decades of massive monetary stimulus. However, the long-term side effects of easing will persist as short-term interest rates remain stuck around zero, and long-term interest rates are not fully market-driven yet, according to Tamura. Speaking to parliament in Tokyo, Bank of Japan Governor Kazuo Oda said on Wednesday that it is important to maintain accommodative monetary conditions to support the economy.

Oda said, “Inflation expectations in Japan over the medium and long term, and the inflation trend, are still on track to move toward 2%.” The governor added, “We will determine short-term interest rates at an appropriate level at each policy meeting by reviewing economic forecasts, prices, and risks.”

The Japanese yen continued its losses after Tamura’s statements, reaching its lowest level against the dollar in 34 years on Wednesday. Despite the interest rate hike last week, Bank of Japan communications reinforced expectations that another interest rate hike might take some time.

A Reuters survey conducted after the policy shift in March showed that more than half of economists expect the Bank of Japan to raise interest rates again this year, although most do not expect interest rates to be raised until at least the fourth quarter.

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