The Bank of Japan (BOJ) faces an internal debate over the right time to raise interest rates, according to the October meeting summary released Monday.
Opinion among monetary policy makers is divided, with some board members warning of the risk that a rate hike could cause renewed volatility in financial markets, especially the yen currency market.
Evolution of the USDJPY in the last month. Source: Yahoo Finance
Caution against market volatility
Many of the nine board members stressed the need to closely monitor market movements, particularly those in the yen, as they consider whether the Japanese economy can withstand higher borrowing costs.
One of the members noted that although the risk of a drastic slowdown in the US economy appears to have diminished, “it is still early to conclude that markets will be restored to calm.” This observation suggests that, for some policymakers, the BOJ should wait before making decisions on future rate hikes.
The importance of clear communication
On the other hand, some board members advocated sending a clear signal about the bank’s willingness to raise rates if economic growth and inflation expectations are met.
“The Bank should consider additional rate increases after a pause to assess the development of the US economy,” said one member, adding that the Japanese economy would no longer require such expansive monetary support. This stance reflects moderate optimism about the strength of Japan’s economic recovery.
Evaluation of the global context and its impact on Japan
During its Oct. 30-31 meeting, the BOJ maintained its ultra-low rate policy but indicated that risks to the U.S. economy were reducing.
This change in the global economic assessment could pave the way for a future rate hike in Japan, although policymakers insist they will take the time necessary to evaluate developments in global markets before adopting any changes.
A panorama of uncertainty
As the BOJ faces these internal pressures, the bank will need to balance its decision with domestic economic projections and the potential impacts of movements in the global market.
For now, caution remains the dominant tone in the statements of board members, who seem aware of the importance of ensuring that any change in rate policy does not destabilize the fragile progress in the Japanese economy.
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