BoJ Review: Japan's estimated natural rate of interest was in the range of around -0.9% to +0.5%

Additional comments

BoJ will carefully examine a wide range of information on spending behaviour by firms and households, financial conditions influencing such behaviour.

Developments in the natural rate of interest and the assessment of the degree of monetary accommodation.

Re-estimated the natural rate of interest using latest data.

Using latest data, Japan's estimated natural rate of interest across were in range of around -0.9% to +0.5%.

Although range itself has not changed significantly, closer look reveals many of the estimates have recently been moderately rising.

Rise in estimates reflect rise in Japan's potential growth rate, market participants' increased appetite to take risks.

It is difficult to pin down level of natural rate of interest in advance.

BoJ is presently adjusting the degree of monetary accommodation toward the sustainable and stable achievement of 2% price target.

Given uncertainty surrounding estimates of the natural rate of interest, it is necessary to assess the degree of monetary accommodation in comprehensive manner, carefully examining economic activity, prices, and financial developments.

Although funding costs are on the rise following changes in the policy interest rate, overall funding demand remains firm.

BoJ considers it appropriate to continue to adjust the degree of monetary accommodation while examining how economic activity and prices respond to changes in short-term rates.

Bank of Japan FAQs

What is the Bank of Japan?

The Bank of Japan (BoJ) is the Japanese central bank, which sets monetary policy in the country. Its mandate is to issue banknotes and carry out currency and monetary control to ensure price stability, which means an inflation target of around 2%.

What has been the Bank of Japan’s policy?

The Bank of Japan embarked in an ultra-loose monetary policy in 2013 in order to stimulate the economy and fuel inflation amid a low-inflationary environment. The bank’s policy is based on Quantitative and Qualitative Easing (QQE), or printing notes to buy assets such as government or corporate bonds to provide liquidity. In 2016, the bank doubled down on its strategy and further loosened policy by first introducing negative interest rates and then directly controlling the yield of its 10-year government bonds. In March 2024, the BoJ lifted interest rates, effectively retreating from the ultra-loose monetary policy stance.

How do Bank of Japan’s decisions influence the Japanese Yen?

The Bank’s massive stimulus caused the Yen to depreciate against its main currency peers. This process exacerbated in 2022 and 2023 due to an increasing policy divergence between the Bank of Japan and other main central banks, which opted to increase interest rates sharply to fight decades-high levels of inflation. The BoJ’s policy led to a widening differential with other currencies, dragging down the value of the Yen. This trend partly reversed in 2024, when the BoJ decided to abandon its ultra-loose policy stance.

Why did the Bank of Japan decide to start unwinding its ultra-loose policy?

A weaker Yen and the spike in global energy prices led to an increase in Japanese inflation, which exceeded the BoJ’s 2% target. The prospect of rising salaries in the country – a key element fuelling inflation – also contributed to the move.