The Bank of Japan's policy-making board exhibited a mixture of opinions regarding the potential for increasing interest rates during its late July meeting, as revealed in the minutes released on Thursday. Nevertheless, it seems that Japan's central bank is determined to decrease what is known as 'quantitative easing,' a strategy involving the purchases of Japanese government bonds (JGBs), which has been a cornerstone of the central bank's operations for decades. During the meeting, board members acknowledged the necessity for long-term interest rates to stabilize within the market, suggesting that the Bank of Japan should move towards a substantial reduction in its JGB purchases.
This strategic change is expected to align with efforts to foster a more stable and predictable interest rate environment. On the issue of inflation, board members reiterated their belief that Japan's inflation rate, measured by the core consumer price index (CPI) that excludes volatile fresh food prices, is anticipated to decline to the Bank of Japan's annual target of 2% by 2025.
The central bank forecasts the core CPI to reach 2.5% in fiscal year 2024, ending on April 1, followed by a drop to 2% during the fiscal years of 2025 and 2026. Interestingly, some members were against the idea of increasing interest rates during the late July session. They cited concerns over sluggish economic growth and Japan’s long-standing history of near-deflation.
One member specifically pointed out the weak dynamics in areas such as the economic growth rate and private consumption, arguing against immediate tightening of monetary policy. Another board member expressed skepticism regarding the likelihood of a rapid shift in an economy that has been in contraction for the past 30 years.
The sentiment reflects a cautious approach, ensuring that any policy changes take into consideration the country's slow rate of recovery. Before the pandemic, Japan's economy was identified by sluggish real growth rates and virtually zero inflation, or mild deflation, despite the Bank of Japan’s adoption of a 2% inflation target back in 2013.
However, similar to many countries, Japan faced a surge in inflation during the pandemic, with the core CPI peaking at a 4.3% year-on-year increase in January 2023. After maintaining short-term rates at near-negative levels of 0.1%, the Bank of Japan began to raise rates in 2024. By July, the short-term target rate was increased to 0.25%.
Additionally, the central bank raised the target ceiling for 10-year government bonds to 1%, a significant rise from levels that were near zero. In August, Japan's core CPI registered at 2.8% year-on-year, continuing to exceed the central bank's target, and has mostly remained within the 2% to 3% range throughout 2024.
The policy board seemed to agree with the Bank of Japan’s projections made in late July, indicating an expected 0.6% expansion in Japan’s gross domestic product (GDP) for fiscal 2024, with further growth of 1% anticipated in both fiscal 2025 and 2026. Moreover, the board noted that corporate profits and investments have shown resilience throughout 2024..