Japan Signals More Rate Hikes Ahead as Neutral Level Seen Much Higher

Source: Coindoo Original Title: Japan Signals More Rate Hikes Ahead as Neutral Level Seen Much Higher Original Link: https://coindoo.com/japan-signals-more-rate-hikes-ahead-as-neutral-level-seen-much-higher/ Japan’s push away from ultra-easy monetary policy appears far from finished, according to people familiar with internal thinking at the Bank of Japan.

While investors are bracing for a rate hike next week, officials inside the institution increasingly believe that borrowing costs will need to rise well beyond that initial step before policy reaches a balanced, neutral setting.

Key Takeaways

• BOJ insiders believe Japan’s neutral interest rate is well above 0.75%.
• Some officials say even 1% would not reach neutral policy.
• Economists expect a 1.25% terminal rate, meaning several hikes may still be ahead.
• The BOJ will study lending conditions after each increase to assess how restrictive policy has become.

Privately, policymakers have been discussing how far interest rates must climb to reach a point where monetary policy neither stimulates nor restrains the economy. The consensus forming behind closed doors: 0.75% isn’t close.

Some officials even argue that 1% remains insufficient, suggesting that Japan’s eventual “neutral rate” sits meaningfully higher than what markets currently expect.

This internal debate also reflects the BOJ’s long-standing challenge: determining the neutral rate is notoriously difficult, and even with updated data, officials see no reason to believe the current broad estimate — roughly 1% to 2.5% — will narrow in the near term.

Ueda’s Comments Add Fuel to Market Speculation

Governor Kazuo Ueda complicated the market picture earlier this month when he acknowledged the need to eventually publish a more refined neutral-rate estimate. While he cautioned that the concept must be treated with wide interpretive boundaries, his remarks nevertheless sparked momentum behind expectations of further tightening.

Economists surveyed by Bloomberg overwhelmingly anticipate a move to 0.75% at next Friday’s meeting, but the survey’s projected endpoint — around 1.25% — signals broad expectations of at least two more increases afterward.

What the BOJ Will Watch as It Continues Tightening

Despite the likelihood of continued hikes, the BOJ is poised to keep describing financial conditions as “accommodative.” Internally, however, attention is shifting to how banks are behaving:

• Are lenders tightening or loosening credit?
• Are businesses facing higher borrowing hurdles?
• Are current rates still pushing economic activity forward?

Officials intend to evaluate each hike’s effect before committing to the next, given how easily the Japanese economy can be disrupted during transitions away from decades-long monetary support.

Japan’s policymakers are therefore signaling a message: the first step to 0.75% is not the finish line, but the starting point of a longer journey toward what they view as a more normal rate environment.