With consumption lacking momentum, BoJ's Asada warns rate hikes could lower underlying inflation

The risk of rate increases weighing on underlying inflation calls for caution while consumption remains subdued, Bank of Japan (BoJ) board member Toichiro Asada said on Thursday. He stressed that the central bank must remain mindful of this risk.

Key remarks

Asked whether another rate increase, such as one in December, would be premature, said the bank must remain mindful that rate hikes could depress underlying inflation while consumption lacks momentum.

Asked whether BoJ rate increases could affect the government’s economic policy, said central bank independence provides an important framework for achieving price stability.

Have no specific terminal rate in mind. In my view, Japan’s nominal neutral rate lies towards the lower end of the range estimated by BoJ staff.

The terminal and neutral rates are very closely linked.

As the BoJ does not control FX directly, will not comment on a desirable dollar/yen level.

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Do BoJ’s Asada Remarks Point to Cautious Rate Hikes and a Limited FX Role?

A cautious, slightly more impactful stance emerges from Asada’s FXS Speechtracker score of 4.2/10, modestly higher than the historical baseline of 3.7/10. His warning that rate increases could weaken underlying inflation while consumption remains subdued carries a dovish bias. It suggests little appetite for a quick follow-up increase, including a December hike.

A relatively low eventual peak in interest rates remains the view supported by Asada’s assessment. He places Japan’s nominal neutral rate towards the lower end of BoJ staff estimates and sees a close link between the terminal and neutral rates. By declining to discuss a desirable DOLLAR/YEN level and emphasising central bank independence, he underscored that domestic price stability, rather than FX targeting, will remain the focus of BoJ policy. This should moderate expectations of aggressive tightening to support the YEN.

How is USD/JPY trading?

USD/JPY is down 0.09%, trading near 159.72 at the time of publication.

Bank of Japan: Frequently Asked Questions

What role does the Bank of Japan play?

As Japan’s central bank, the Bank of Japan (BoJ) determines the country’s monetary policy. Its responsibilities include issuing banknotes and managing currency and monetary conditions to maintain price stability, expressed as an inflation target of around 2%.

How has the Bank of Japan’s policy evolved?

To support economic activity and lift inflation from low levels, the Bank of Japan adopted an ultra-loose monetary policy in 2013. At the heart of this approach is Quantitative and Qualitative Easing (QQE): printing banknotes to purchase assets, including government and corporate bonds, and thereby supplying liquidity. The bank stepped up this strategy in 2016, easing policy further by introducing negative interest rates before moving to direct control of its 10-year government bond yield. A rate increase in March 2024 marked the BoJ’s effective retreat from its ultra-loose monetary stance.

How does Bank of Japan policy affect the Japanese Yen?

The Yen weakened against its major currency peers as a result of the Bank’s substantial stimulus. That depreciation intensified in 2022 and 2023 as the policy gap between the Bank of Japan and other leading central banks grew. While those banks raised interest rates sharply to tackle inflation at multi-decade highs, the BoJ’s stance widened interest rate differentials with other currencies, putting downward pressure on the Yen. The currency partly reversed this trend in 2024 after the BoJ chose to move away from ultra-loose policy.

What prompted the Bank of Japan to begin reversing ultra-loose policy?

Japanese inflation climbed above the BoJ’s 2% target as Yen weakness and a surge in global energy prices pushed prices higher. Expectations of salary increases in Japan, a key driver of inflation, also helped prompt the policy shift.