IMF: Further hikes in BoJ short-term rates hikes should continue and data-dependent
The International Monetary Fund (IMF) said on Tuesday that Japan's commitment to allowing the Japanese Yen (JPY) to move flexibly would let the Bank of Japan (BoJ) focus on achieving price stability while warning against the call by certain experts to use monetary policy to limit the currency's depreciation, per Reuters.
Key quotes
“Further hikes in Japan's short-term policy rate should proceed at a gradual pace and be data-dependent.”
"underscored that Japan's longstanding commitment to a flexible exchange rate regime will help absorb shocks and support monetary policy's focus on price stability.”
“BOJ's state-contingent purchases of JGBs will help mitigate excessive shifts in yields that could undermine financial stability during policy transition.”
“Clear, effective communication strategy by BOJ that continues to underscore factors behind the pace of rate hike will be a key.”
Market reaction
At the time of writing, USD/JPY is trading 0.08% higher on the day to trade at 156.32.
Bank of Japan FAQs
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%.
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.
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.
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. Still, the Bank judges that the sustainable and stable achievement of the 2% target has not yet come in sight, so any sudden change in the current policy looks unlikely.
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