Seiji Adachi, a member of the Bank of Japan’s board, underscored the importance of a measured approach to increasing the benchmark interest rate, suggesting that the central bank is likely to maintain its current policy stance during its upcoming meeting later this month. Speaking to local business leaders in Kagawa on Shikoku Island, Adachi highlighted the need for caution: “We must ensure that our rate increases are extremely gradual while keeping financial conditions accommodative until we reach a consistent price trend of 2%.”
As a prominent dove within the board, Adachi’s comments come just two weeks before the BOJ’s policy meeting on October 31, with economists largely predicting that the bank will refrain from making any changes. Some analysts have even shifted their forecasts for the BOJ’s next interest rate hike to January, particularly following Prime Minister Shigeru Ishiba’s endorsement of monetary easing during his initial days in office earlier this month.
Adachi’s insistence on a slow tightening process may intensify market speculation regarding the likelihood of no further rate increases this year. Expected data release on Friday could show that consumer inflation eased to 2.3% in September, marking the slowest increase since April, while extending the streak of months with inflation at or above the BOJ’s 2% target to 30.
While the current economic indicators justify a shift toward policy normalization, Adachi warned against the dangers of a too-rapid increase in rates, which could potentially lead the economy back into deflation.
Following Adachi’s remarks indicating that conditions for policy normalization had been satisfied, the yen saw a brief increase before falling again, as traders adjusted their positions, according to Hideki Shibata, a senior strategist at Tokai Tokyo Intelligence Lab Co. Recently, the yen has weakened amid diminishing expectations for a narrowing interest rate gap between the U.S. and Japan. Adachi cautioned that a stronger yen could hinder the BOJ’s efforts to achieve sustained inflation, particularly after the Federal Reserve began its easing cycle last month.
“There is a possibility that a correction of the weak yen could gain momentum,” he noted, adding that this could exert downward pressure on inflation, especially for consumer goods.
Adachi acknowledged the uncertainty surrounding Japan’s neutral interest rate, with one board member suggesting it should be at least 1%, indicating that there remains room for rate increases while the BOJ aims to maintain overall accommodative financial conditions. “At this point, it’s reasonable to use the most cautious estimate of around 1%,” Adachi stated.
Central banks in developed economies are increasingly gravitating toward neutral policies, with many lowering rates to achieve this objective. Earlier this week, Lorie Logan, President of the Federal Reserve Bank of Dallas, emphasized the importance of a gradual approach as U.S. policymakers adjust their policy settings.
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