BoJ Minutes: Members agree it was suitable for bank to keep increasing policy interest rate

Members of the Bank of Japan (BoJ) unanimously agreed it was appropriate for the bank to continue raising the policy interest rate during their September meeting, as outlined in the BoJ Minutes. One member suggested the bank should bring the policy rate closer to the target soon, while maintaining the ability to make rapid adjustments up or down.

Another member emphasized the importance of demonstrating the BoJ's determination to prevent price surges by swiftly responding to global economic conditions. The Cabinet Office representative stressed the central bank must fulfill its accountability by carefully examining the overall impact of past rate decisions. If indications of rising price deviation appeared, the BoJ might need to accelerate interest rate hikes, according to one member.

While one member recommended a cautious approach, a Cabinet Office rep stressed it was crucial for the BoJ to take proactive, appropriate steps amidst significant economic and market fluctuations. Many BoJ members expressed difficulty in pinpointing the neutral interest rate level in advance and argued the bank should adjust policy as it assesses changes in financial conditions, such as short-term interest rates, and their impact on economic activity and prices.

The Ministry of Finance expects the BoJ to thoroughly assess the impact of any shift in the policy rate on the economy and prices. Some members noted that services prices have been steadily rising over recent years, which could potentially lead to higher underlying inflation if the trend accelerates. One member pointed out that the current pace of CPI increase has largely met the price stability target, while another stated that underlying CPI inflation has already reached a level consistent with the 2% target.

Several members highlighted growing chances of CPI inflation increasing from early autumn. At the time of writing, the USD/JPY exchange rate was down 0.03% on the day at 158.39. The BoJ, Japan's central bank, was established in 2013 to maintain price stability, aiming for an inflation target around 2%. The bank adopted an ultra-loose monetary policy in 2013 to stimulate the economy and fuel inflation in a low-inflation environment.

Since then, the BoJ has implemented quantitative and qualitative easing measures, including buying government and corporate bonds to provide liquidity. In 2016, the BoJ intensified its strategy by introducing negative interest rates and directly controlling the yield of its 10-year government bonds. In March 2024, the BoJ lifted interest rates, marking a retreat from its ultra-loose monetary policy stance.

The massive stimulus caused the Yen to depreciate against major currency peers, with the trend accelerating in 2022 and 2023 due to divergent policies among major central banks. The BoJ's policy led to a widening differential with other currencies, contributing to a weaker Yen. This trend partly reversed in 2024 after the BoJ abandoned its ultra-loose policy.

The weakening Yen and rising global energy prices led to an increase in Japanese inflation, surpassing the BoJ's 2% target. The prospect of rising wages, a key driver of inflation, also contributed to the move.