Policy path stays upward despite global market turbulence
Bank of Japan Deputy Governor Ryozo Himino said the central bank is expected to keep lifting interest rates, while avoiding any guidance on when the next move could come. Speaking on Monday as the Middle East conflict increased uncertainty across financial markets, Himino argued that volatility alone would not derail the BOJ’s normalization plan.
He warned against treating market swings as an automatic trigger for policy shifts, saying it would be inappropriate to mechanically link rate decisions to day to day market developments. Instead, he said officials must evaluate a broad set of indicators when deciding the timing of the next adjustment, particularly as underlying inflation moves closer to the BOJ’s 2% target but has not yet stabilized around it.
“At present, we can gradually adjust the degree of accommodation by raising rates toward levels deemed neutral to the economy,” Himino said at a press conference on Monday, reinforcing expectations that the policy stance remains on a tightening trajectory even if the pace is not pre set.
Focus shifts to neutral rate estimates and incoming data
Himino emphasized that the concept of a neutral rate, the policy level that neither stimulates nor restrains growth, cannot be identified with precision. He said it is difficult to determine exactly how far the BOJ’s current policy rate is from neutral, and he urged a comprehensive approach that weighs the information available at the time of each meeting.
He added that officials should closely scrutinize multiple data points to judge whether conditions justify another move. His comments pointed to a decision framework anchored in inflation momentum and real economy performance rather than a fixed calendar.
Markets have paid close attention to Himino because he previously telegraphed policy action. He delivered strong hints ahead of a rate increase to 0.5% from 0.25% in January last year, with that speech arriving roughly a week before the move. Monday’s remarks, by contrast, contained no such directional timing signal, even as he reiterated that the BOJ can continue moving gradually toward neutrality.
Normalization backdrop meets yen pressure and energy risks
The BOJ began stepping away from its ultra loose framework after ending a decade long period of massive stimulus in 2024. It has since raised rates in several stages, including a move in December, as officials judged Japan was making steady progress toward durably achieving the 2% inflation objective.
With the yen remaining weak and import costs contributing to broader price pressure, market participants had increasingly positioned for another increase to 1.0% from the current 0.75%, with some expectations centered on March or April. Analysts said the weekend U.S. Iran crisis could complicate the decision by weighing on growth while also pushing prices higher through a jump in crude oil.
Himino declined to estimate how the conflict might feed into the BOJ’s policy calculus, saying it is too early to predict the impact on Japan’s economy. In earlier remarks before the press conference, he said the effects of past rate increases on economic activity appear to have been limited, suggesting that recent tightening has not materially disrupted momentum so far.
Inflation gap narrows, but BOJ warns against chasing markets
Himino addressed the inflation gap, defined as the difference between underlying inflation and the BOJ’s target. He said the gap is slightly negative at present but is expected to move toward zero over time. That trajectory, he argued, would support a gradual shift away from accommodation through moderate policy rate increases.
He acknowledged that market conditions matter because they influence economic activity and prices. However, he cautioned that the market response to monetary policy is not linear and can be difficult to interpret in real time. He warned that reacting to every market fluctuation could encourage speculative behavior and lead to the central bank being second guessed.
“Reacting to every fluctuation in the market could lead to the Bank being second-guessed by speculators,” Himino said. He added that policymakers should aim to build confidence among market participants that decisions are being made in line with developments in growth and inflation, rather than as a reflex to short term price moves.
