MNI POLICY: BOJ Financial Index At Accommodative Levels

MNI (TOKYO) - The Bank of Japan is relying heavily on an internal financial conditions index in the absence of a reliable calculation of the neutral level of rates as it feels its way towards tightening, and this indicates that monetary policy remains more accommodative than average, MNI understands.

The index, which has not been made public, is calculated using a composite of exchange rates, stock prices, funding costs and interest rates. Given the practical difficulty of calculating the neutral level of rates, at which policy is neither expansionary or contractionary, officials are relying on this index and economic data as they gauge the effects of their interest rate moves and the extent of monetary policy transmission.

After hiking its overnight rate at its last two quarterly meetings, taking it out of negative territory, Governor Kazuo Ueda has indicated that while with real rates at low levels the BOJ intends to continue to remove monetary stimulus, it is in no hurry for further immediate tightening given unstable markets and high uncertainties over a soft-landing of the U.S. economy. (See MNI POLICY: Fed Cut No Obstacle For BOJ Hiking Path)

October will be a key month to measure the momentum of price increases, as it marks the start of the fiscal year’s second half and many businesses plan to revise retail prices on the back of high labour costs. The BOJ may prefer to take its time to analyse this data and to keep policy on hold at that month’s meeting, but accommodative signalling from the financial conditions index will support further tightening further on.