The Bank of Japan (BOJ) announced its cautious approach to achieving its 2-percent inflation target. This decision was made while taking into account the progress made on prices and wages.
Governor Kazuo Ueda acknowledged the positive steps Japan has taken in moving away from zero and building up inflation expectations. He emphasized, however, the importance of firmly establishing inflation expectations at the 2-percent goal. He recognized that the BOJ faces similar challenges to other central banks but added that some challenges are uniquely difficult for them.
Ueda specifically mentioned the difficulty of accurately estimating the neutral interest rate in Japan, given the prolonged period of near-zero short-term interest rates over the past three decades. The lack of significant interest rate fluctuations makes it challenging to assess the economy’s response to changes in interest rates.
BOJ Deputy Governor Shinichi Uchida agreed with Ueda’s sentiments. He noted that an end to Japan’s prolonged battle against deflation is approaching. However, setting inflation expectations at the 2-percent target remains a significant challenge.
In March, the BOJ decided to bring an end to its eight-year-long negative interest rates and other unconventional stimulus measures. The BOJ believed that it was now possible to achieve its 2-percent inflation target. With growth and inflation aligning with their projections, the central bank plans to gradually increase rates to levels deemed neutral for the economy. This has led to expectations that the BOJ will soon begin reducing its bond purchases. This anticipation caused the 10-year Japanese government bond yield to hit a 12-year high last week.
Moreover, the markets have also priced in a potential interest rate hike to at least 0.20 percent by the end of the year.
