Bank of Japan (BOJ) Governor Kazuo Ueda spoke in Washington on Wednesday, emphasizing that Japan’s monetary policy normalization process is only in its initial stages. He specifically noted that amid increasing global economic uncertainties, he has been closely monitoring U.S. economic developments over the past two to three months and will continue to track U.S. economic indicators, including employment metrics.

Regarding Japan’s current financial environment, Ueda stated that considering inflation factors, real interest rates remain at low levels, and the current financial conditions are “quite accommodative.” The BOJ’s policy objective is to adjust interest rates to a neutral level – a rate that neither stimulates economic overheating nor leads to economic cooling when economic activity and price trends meet expectations.

Reviewing this year’s monetary policy adjustments, the BOJ first abandoned its unconventional easing policy in March. Subsequently, at the July monetary policy meeting, it decided to raise the policy rate to 0.25% while reducing government bond purchases. This decision was viewed as an “unexpected move” by markets, leading to severe market volatility in early August.

Addressing the market volatility in July, Ueda acknowledged room for improvement in communication. He recalled that policy committee members did not make public statements at the time, and while policy information was largely consistent with June, “it might have been better” if there had been more communication opportunities in July.

Ueda expressed satisfaction with the policy normalization process thus far. He considers the gradual flexibility adjustments to the Yield Curve Control (YCC) in July and October 2023, along with subsequent policy adjustments such as ending negative interest rates, as “successful.” He also mentioned feeling “fortunate” that the moderate pace of underlying inflation increase has allowed the central bank to proceed with normalization at a comfortable pace.

Krishna Srinivasan, Director of the International Monetary Fund’s (IMF) Asia and Pacific Department, while discussing Japan’s price and monetary policy issues, declined to comment specifically on monetary policy prospects but hinted that the BOJ would continue its rate hike process.

Key Points:

• BOJ Governor confirms monetary policy normalization is still in its early stages
• Current Japanese financial environment remains accommodative with low real interest rates
• Central bank aims to adjust rates to neutral level
• Multiple policy adjustments have been implemented since March this year
• July policy adjustment triggered market volatility; BOJ acknowledges need for improved communication
• Ueda expresses satisfaction with current policy normalization progress
• IMF suggests BOJ likely to continue rate hikes