By Leika Kihara
TOKYO (Reuters) -New Bank of Japan board member Junko Koeda said the country’s real interest rates are currently “extremely low,” as inflation accelerates backed by solid growth in wages.
While she declined to comment on how soon the central bank should raise interest rates, Koeda said underlying inflation was key to judging whether Japan could sustainably meet its 2% price target.
“Looking at various indicators, we can say Japan’s underlying inflation is heading towards” the central bank’s 2% target, said Koeda, a former academic who joined the board on Wednesday.
Japan is showing signs of progress in achieving an environment where prices and wages increase in tandem, she said.
“Real interest rates are currently extremely low,” she said, adding that the BOJ must scrutinise how rising prices could affect corporate behaviour and public perceptions about inflation.
Koeda also said there was high uncertainty on overseas economic developments, including the potential impact of U.S. trade policy.
The government in January nominated Koeda, who had warned of the cost of prolonged monetary easing, to succeed Seiji Adachi.
It is the first time two women have sat on the nine-member board which until Koeda’s arrival had Junko Nakagawa as its sole female member.
Koeda said that after Japan’s long experience of ultra-low interest rates the BOJ must closely monitor how its recent rate hikes could affect the economy as some of those effects may only appear with a lag.
She has joined the board at a critical time for the BOJ, which ended a radical policy of stimulus last year and raised interest rates in January to 0.5% – still low by global standards but the highest level Japan has seen since the 2008 global financial crisis.
BOJ Governor Kazuo Ueda has signalled the bank’s readiness to keep raising interest rates if economic and price developments move in line with its forecasts.
But he has not specified how far the BOJ could eventually raise rates, citing the difficulty of estimating the country’s neutral interest rate, the level where rates neither cool nor overheat the economy.
Some analysts hope that Koeda, an academic specialising in macroeconomics and finance, will bring her expertise to the BOJ’s analyses focusing on where Japan’s neutral rate may lie.
“The neutral interest rate is an important concept in guiding monetary policy,” Koeda said. “We need to look not just at the actual estimates, but the features and hypothesis of the data and models used to produce them,” she said.
Analysts see Koeda as hawkish on monetary policy given her past studies warning of the cost of prolonged, ultra-low interest rates.
A month after the BOJ’s decision in March 2024 to end negative interest rates, Koeda endorsed the move in a newspaper commentary, saying that it went in the right direction, and she called for the need to shrink the BOJ’s massive balance sheet.
But Koeda said on Wednesday it was hard to conclude now the pros and cons of the BOJ’s prolonged history of unconventional monetary easing steps.
“My analyses have been mostly about the economic impact of (the BOJ’s) exit from the zero lower bound,” she said. “The same model cannot be used to assess how the economy could respond to a hike in already positive interest rates,” she said.
(Reporting by Leika Kihara; Editing by Christian Schmollinger and Hugh Lawson)
