MNI POLICY: BOJ Struggling To Gauge Real Interest Rate Level

A split in inflation expectations between consumers and financial markets is making it difficult for the Bank of Japan to gauge exactly where the current real interest rate is, MNI understands.

The latest BOJ analysis shows households' short-term inflation expectations have inched higher as prices of daily necessities have risen through the pandemic. Expectations across the financial markets, more strongly influenced by crude oil prices, have weakened in the same period.

This has left the BOJ trying to gauge its current policy measures and whether it needs to act further. If it sees that real interest rates have risen, reducing the effectiveness of its accommodative policy, the Board would have to consider lowering nominal rates, although there is limited room for maneuver

LOWER GROWTH WORRY

The BOJ see key core consumer price inflation negative for the time being and officials worry that a weaker inflation rate would lower growth expectations, a troublesome factor for policymakers.

The downward revision of medium- to long-term inflation expectations by businesses seen in this week's Tankan survey has added to the central bank's unease On average, firms saw a 0.6% rise three years out and a 0.8% rise five years ahead, down from +0.7% and +0.9%, respectively in the June survey.