BOJ's Takata: pause in rate hikes appropriate now, may resume hikes flexibly later

Soichiro Takata: Can Pause Rate Hikes Now to Gradually Achieve Price Target

On Thursday, July 4th, Bank of Japan policymaker Soichiro Takata stated in a public speech in Mie Prefecture, Japan, that the Bank of Japan is currently in a stage where it can pause interest rate hikes to maintain the present accommodative policy stance, thereby steadily advancing Japan’s economy towards achieving the 2% price stability target.

Takata highlighted that Japan's economy is gradually approaching the price stability target set by the Bank of Japan, and recent inflation has shown a moderate upward trend. To maintain this momentum, the central bank needs to continue its accommodative monetary policy, avoiding premature withdrawal of support to sustain stable domestic demand growth.

Uncertainty Remains High, Flexible Policies Needed to Respond to Changes

Takata emphasized that the global economy faces significant uncertainty, and the Bank of Japan's future policies should remain flexible, focusing on domestic economic and price trends as well as closely monitoring external changes, especially potential adjustments in U.S. monetary policy.

He noted that if U.S. monetary policy changes in the future, the Bank of Japan may need to flexibly restart the rate hike cycle to maintain the yen's exchange rate and financial market stability, preventing capital outflows from impacting the domestic financial environment.

"Authorities should not be overly pessimistic; they should adjust monetary policy flexibly and timely on the basis of ensuring stable economic growth and price stability," Takata added.

Pausing Rate Hikes Does Not Mean Exit from Tightening Cycle

In his speech, Takata reiterated that the current pause in rate hikes does not mean the Bank of Japan has fully exited the rate hike cycle but is a phased adjustment based on current domestic economic data and price trends. If the economy and prices continue to improve, the Bank of Japan may resume the rate hike pace to prevent inflation from rising unexpectedly and mitigate asset bubble risks.

Previously, the Bank of Japan maintained short-term interest rates in the 0%-0.1% range at its June meeting, indicating it would closely monitor economic and inflation data in the coming months before deciding on any further monetary policy adjustments.

Yen Trends and Policy Expectations

Influenced by Takata's remarks, the market's expectation for the Bank of Japan to maintain the existing interest rate level in the short term has strengthened, with the yen/dollar exchange rate experiencing short-term intraday fluctuations but remaining stable overall. The market widely believes that if the U.S. cuts rates in the second half of the year, the Bank of Japan may flexibly adjust the policy pace while observing global capital flows and domestic inflation.

According to the chief economist at JPMorgan Japan, if the global economy slows down, the Bank of Japan may still maintain a pause in rate hikes within the year, and after seeing domestic wage increases and sustained price stability, it may choose to restart the rate hike cycle.

Bank of Japan policymaker Soichiro Takata emphasized that the Bank of Japan can pause rate hikes in the current context of promoting stable economic recovery and price stability, but may flexibly restart the rate hike cycle in the future to respond to global economic and market changes, and protect financial stability and economic stability.

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