BoJ’s Ueda: Central bank raised rates in July as economy, inflation moved mostly in line with forecast

Bank of Japan (BoJ) Governor Kazuo Ueda told the Japanese parliament on Friday, “the BoJ raised rates in July as economy and inflation moved mostly in line with forecast.“

Additional quotes

No change in stance about adjusting monetary easing if economy, inflation move in line with forecast.

Recent BoJ policy decisions have been appropriate.

Showing future policy path could cause unnecessary speculation.

Rise in import prices continued longer than expected.

Weak Yen could affect BoJ’s price projections.

FX moves affect economy through various channels.

FX moves at times could affect economy, as well as risks to economic forecast.

FX moves could affect BoJ’s median forecast, in which case we will decide what would be appropriate policy response to such change in forecasts.

FX volatility could also create upside, downside risks to our forecasts, in which case we will scrutinize degree of risk to determine whether policy response needed.

Hard to promise when and in what form we can disclose Japan's estimated neutral rate.

If we can sufficiently narrow down estimated neutral rate, we must disclose our findings to public, media, markets.

Forex could affect policy depending on degree of overshoot or undershoot risks in price outlook.

Will narrow down range of expected neutral rate while monitoring how higher interest rates affect economy.

July rate hike was done under accommodative conditions.

Not planning to dispose BoJ’s ETF assetts but when we do we will aim to avoid causing market disruption and sell at appropirate prices.

Decided at July MPM that adjusting degree of monetary easing appropriate from standpoint of stably, sustainably achieving price target.

Real rates likely remain negative, easy financial conditions will keep supporting economy.

Market moves since August have been rapid, markets remain unstable.

Market reaction

USD/JPY extends losses to challenge 145.50 in reaction to Governor Ueda’s comments. The pair is down 0.44% on the day.

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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