MNI POLICY: BOJ Fears Neutral Lower Than Previously Estimated
MNI (TOKYO) - Officials at the Bank of Japan fear that the real neutral rate of interest could be even lower than the previously-estimated range of -1% to +0.5%, reducing the probability that it will be able to take its policy rate to a tightening cycle high of 1%, MNI understands.
In nominal terms, the neutral level of rates could be two percentage points higher than the real neutral rate, assuming that the Bank of Japan sustainably achieves its inflation target. If the real neutral rate is lower than previously thought, at as low as -1.25%, due to a drop in the rate of potential economic growth and a rise in the savings ratio, that means raising the Bank’s policy rate over 0.75% would take monetary policy into restrictive territory, weighing on economic activity.
The concerns over neutral come as BOJ officials have faced political pressure to slow their pace of interest rate hikes. (See MNI POLICY: BOJ’s Political Concerns Slowing Hikes)
In July, the BOJ raised the policy rate to 0.25% from a range of zero percent to 0.1% and Bank board members had largely expected to make several further hikes roughly once every half year, taking the official benchmark to 1% by as early as the second half of fiscal 2025 in order to cao inflation. A possible rise to 0.5% in January still looks likely, as it would leave policy in accommodative territory.
The BOJ’s former estimate of neutral was only based on data until the first quarter of 2023.