KOFU, Yamanashi Pref.: Bank of Japan Deputy Governor Ryozo Himino said Wednesday that financial and capital markets “remain stable” and that the central bank needs to monitor their developments “with the utmost vigilance.”

The BOJ will “carefully examine” the impact of the market turmoil, he also said in a speech in Kofu, Yamanashi Prefecture, central Japan.

He made the remarks after stock prices and foreign exchange rates fluctuated wildly following the BOJ’s decision in late July to conduct an additional interest rate hike.

The bank’s basic stance on the future conduct of monetary policy is that it will examine the impact of market developments and the rate hike and that “if it has growing confidence that its outlook for economic activity and prices is realized, it will adjust the degree of monetary accommodation,” Himino said.

His view echoed BOJ Governor Kazuo Ueda’s remarks at last week’s parliamentary meetings indicating the central bank’s plan to pursue interest rate hikes while closely watching financial market developments for the time being.

At its policymaking meeting at the end of July, the BOJ decided to raise its target for the unsecured overnight call rate, Japan’s benchmark short-term interbank lending rate, to around 0.25 percent from the range of around zero to 0.1 percent.

If the BOJ’s 2 percent inflation target is reached, the bank is expected to raise the policy rate target to a level that neither heats nor cools the economy. The neutral rate is estimated to be around 1 percent to 2.5 percent.

The neutral interest rate is “a valuable concept that helps us clarify our thinking,” Himino said.

“Some…even go so far as to imagine that a central bank sets the terminal policy rate at the estimated level of the neutral rate and infers the policy trajectory working backward from there,” Himino said. But he added, “I do not think such an approach will work so well.”

The BOJ “has no other choice than to chart a way forward examining how the economy and prices respond as it conducts monetary policy,” he said.

On the Japanese economy’s performances in the years to come, Himino said the BOJ’s “baseline scenario for fiscal 2025 and 2026 envisions a reasonably balanced state, where the inflation rate is consistent with the price stability target and the economic growth is slightly above cruising speed.”

He denied the possibility of a slowdown in consumption, citing the positive impact of wage hikes.

JIJI Press