BoJ’s Takata: Hard to debate at this stage to what degree BoJ can shrink its balance sheet

Bank of Japan (BoJ) Board Member Hajime Takata made some comments on the bank’s policy outlook and economic prospects during his speech on Thursday.

Key quotes

Japan's economy recovering moderately although some weak signs seen

Stock, FX markets have seen big volatility but we still see achievement of our inflation target in sight.

We are seeing renewed rises in import prices.

We must be vigilant to chance of renewed wave of price hikes, while taking into account impact of Yen rise in early august.

Hard to pin down precise level of Japan's natural rate of interest.

Japan's current real interest rate is below estimated natural rate of interest, which means monetary conditions remain accommodative.

Fallout from market turbulence in early august remains, so we must scrutinize the impact for time being.

Market reaction

At the time of writing, USD/JPY holds its renewed uptick, still flat on the day at 143.70.

Bank of Japan FAQs

What is the Bank of Japan?

The Bank of Japan (BoJ) is the Japanese central bank, which sets monetary policy in the country. Its mandate is to issue banknotes and carry out currency and monetary control to ensure price stability, which means an inflation target of around 2%.

What has been the Bank of Japan’s policy?

The Bank of Japan has embarked in an ultra-loose monetary policy since 2013 in order to stimulate the economy and fuel inflation amid a low-inflationary environment. The bank’s policy is based on Quantitative and Qualitative Easing (QQE), or printing notes to buy assets such as government or corporate bonds to provide liquidity. In 2016, the bank doubled down on its strategy and further loosened policy by first introducing negative interest rates and then directly controlling the yield of its 10-year government bonds.

How do Bank of Japan’s decisions influence the Japanese Yen?

The Bank’s massive stimulus has caused the Yen to depreciate against its main currency peers. This process has exacerbated more recently due to an increasing policy divergence between the Bank of Japan and other main central banks, which have opted to increase interest rates sharply to fight decades-high levels of inflation. The BoJ’s policy of holding down rates has led to a widening differential with other currencies, dragging down the value of the Yen.

Is the Bank of Japan’s ultra-loose policy likely to change soon?

A weaker Yen and the spike in global energy prices have led to an increase in Japanese inflation, which has exceeded the BoJ’s 2% target. With wage inflation becoming a cause of concern, the BoJ looks to move away from ultra loose policy, while trying to avoid slowing the activity too much.

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