BoJ's Asada warns weak consumption means rate hikes could lower underlying inflation

With consumption lacking momentum, the Bank of Japan (BoJ) must remain alert to the risk that interest rate increases could depress underlying inflation, board member Toichiro Asada said on Thursday.

Selected remarks

Must be mindful of risk rate hikes could push down underlying inflation given consumption lacks momentum, when asked whether further rate hike such as in December would be premature.

Central bank independence is an important framework to achieve price stability, when asked if BoJ rate hikes could affect government’s economic policy.

Don’t have specific idea in mind on terminal rate. My view is that Japan’s nominal neutral rate is in the lower side of boj staff’s estimated range. 

Terminal rate and neutral rate are very closely intertwined. 

BoJ does not directly control FX, so won’t comment on what desirable level of dollar/yen could be. 

BoJ’s Asada signals caution on further rate rises, with FX a limited consideration

A reading of 4.2/10 on FXS Speechtracker places Asada modestly above the historical baseline of 3.7/10, pointing to remarks with slightly greater impact but a still-cautious stance. His warning that higher rates could weaken underlying inflation while consumption remains subdued has a dovish tilt. It suggests little appetite for a swift follow-up increase, such as a December hike.

A relatively low eventual peak in interest rates is consistent with Asada’s assessment that Japan’s nominal neutral rate sits towards the lower end of BoJ staff estimates, alongside his view that the terminal and neutral rates are closely linked. By declining to identify a desirable DOLLAR/YEN level and emphasising central bank independence, he underlined that domestic price stability, rather than exchange-rate targeting, will remain the focus of BoJ policy. That should curb expectations of aggressive tightening aimed at supporting the YEN.

USD/JPY edges lower

USD/JPY is trading around 159.72 at the time of writing, down 0.09%.