BOJ strategist expects gradual rate hikes, downplays currency impact on policy

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In the intricate dance of monetary policy, the Bank of Japan (BOJ) has managed to navigate a delicate path away from its extensive stimulus program. According to former policy board member Makoto Sakurai, the BOJ’s successful transition leaves them poised for a cautious approach to potential interest rate hikes, likely not until the fall.

Sakurai commended the BOJ’s accomplishment, describing it as conquering a mountain, with no urgent issues remaining. He anticipates a gradual normalization process, potentially starting next year with modest 25-basis-point rate increases every six months.

Contrary to some expectations for an earlier move to narrow the interest rate gap with the U.S., Sakurai believes any action this autumn would be minimal, akin to a jab. He downplays the impact of foreign exchange rates on monetary policy, suggesting that unless the yen weakens significantly, the government’s currency authorities will take the lead.

While the rate differential may persist for a while, it is expected to narrow this year. Despite indications from two U.S. Federal Reserve officials suggesting a possible series of rate cuts in 2024, the BOJ is likely to proceed cautiously, focusing on strengthening the virtuous cycle of wages and inflation.

Governor Kazuo Ueda’s cautious stance on commenting on currencies marks a departure from his predecessor’s more vocal approach. The BOJ’s recent decision to end its extraordinary stimulus measures, including nixing the negative rate and yield curve control mechanism, reflects a strategic move to seize opportunities for action when appropriate.

In the coming months, the BOJ will monitor indicators such as wage growth among small companies and overall economic strength. With the biggest hurdles behind them, the BOJ is expected to have a relatively quiet period in terms of policy actions, as it confirms the strengthening of the economy’s fundamentals.

(Source: Bloomberg | Japan Times)

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