The minutes of the Bank of Japan's policy meeting revealed that some members explicitly pointed out that Japan’s real policy interest rate is “the lowest in the world,” hinting at further interest rate hikes. The minutes also disclosed internal discussions on the pace of rate hikes, the level of neutral interest rates, and concerns about yen depreciation.
Some members of the Bank of Japan's policy committee signaled at the meeting earlier this month that the country’s real interest rates remain very low. At this meeting, the authorities raised the benchmark interest rate, indicating that there may be further rate hikes in the future.
According to the minutes of the meeting released on Monday, one of the nine committee members stated at the two-day meeting that concluded on December 19: “Japan’s real policy interest rate is undoubtedly the lowest in the world at present.”
The member noted: “It is appropriate for the Bank of Japan to adjust the degree of monetary easing,” citing the impact of exchange rate fluctuations on prices.
At this meeting, the committee raised the benchmark interest rate to 0.75%, the highest level in 30 years. The release of these minutes comes as the market has been seeking clues about the pace of the Bank of Japan’s next interest rate hike. The meeting records showed that one member stated the central bank should adjust its policy every few months, a rhythm broadly consistent with the median expectations of observers of the Bank of Japan.
Economists surveyed by Bloomberg expect another interest rate hike in about six months, with many believing that the terminal interest rate for the current cycle will reach 1.25%. Hideo Hayakawa, former executive director of the Bank of Japan, said earlier this month that the central bank might raise interest rates to 1.50% by early 2027.
The minutes released on Monday clearly indicated that the Bank of Japan’s policy interest rate has not yet reached a neutral level. One member noted: “It can be said that there is still quite a distance to the neutral interest rate level.”
At the press conference following the interest rate decision on December 19, Bank of Japan Governor Kazuo Ueda stated that it is difficult to precisely determine the neutral interest rate level, which is considered the point where the policy rate neither stimulates nor restricts economic activity. A study by the Bank of Japan suggested that the neutral interest rate lies within a broad range of 1% to 2.5%.
The minutes showed that some members agreed with Kazuo Ueda’s views on the neutral interest rate, acknowledging the difficulty in determining that level. One member stated that the central bank should interpret the neutral interest rate with considerable flexibility, while another member argued that the central bank should not target a specific level but maintain flexibility in its policy approach.
As for the latest interest rate hike decision, one member stated that the mechanism for wage and price increases was likely to be sustained due to an increased probability of achieving economic prospects. Another member added that the impact of U.S. tariffs was no longer seen as an unprecedented risk, a factor that had previously led the central bank to pause tightening measures earlier this year.
The minutes also indicated that some committee members were concerned about yen depreciation, which may have been one of the considerations prior to the December 19 action. Nevertheless, the minutes showed that the yen was specifically mentioned only once during this month’s discussion, while the impact of exchange rate trends was cited four times.
According to the minutes of the January meeting, when the Bank of Japan raised its benchmark interest rate in January, the yen was mentioned seven times and exchange rate dynamics were referenced twice.
Before this month's meeting,$JPY/USD (JPYUSD.FX)$the exchange rate had fallen to its weakest level in approximately ten months, nearing the 160 mark, a level that previously prompted authorities to intervene in the foreign exchange market. Despite the narrowing of the interest rate differential between the US and Japan following actions by the Bank of Japan and the Federal Reserve, the yen remained weak, prompting Japanese authorities to intensify verbal warnings against excessive market volatility.
The minutes revealed that the government of Prime Minister Sanae Takagi did not oppose the Bank of Japan’s latest interest rate hike but adopted a cautious tone. Representatives from the Cabinet Office attending the meeting stated, 'It is necessary to fully monitor the future developments of factors such as corporate fixed asset investment and corporate profits.'
Sanae Takagi, known for advocating stimulative policies, assumed office as prime minister in October. Her rise to power raised questions in the market about Kazuo Ueda’s room to continue advancing policy normalization, but the political costs associated with inflation and yen weakness are considered to have limited resistance to this month’s rate hike.
Minoru Kiuchi, Minister for Economic Growth Strategy, was one of the three representatives from the Cabinet Office who attended the meeting. He was a founding member of a group within the ruling party that advocated support for stimulative policies.
The market had largely priced in this month's interest rate hike in advance, as signals from Kazuo Ueda prior to the decision indicated that conditions for scaling back monetary easing were falling into place.
Editor/melody