Bank of Japan Must Tread Carefully in Normalising Policy

• The Bank of Japan must be careful when normalising monetary policy due to uncertainty about how the economy would react to a new environment of positive interest rates, Seiichi Shimizu, the central bank's assistant governor, said on Thursday.
• While many advanced economies have long-term inflation expectations anchored at their central banks' 2.0% target, the situation in Japan is different in that inflation expectations and underlying inflation remain lower, Shimizu explained during a seminar hosted by the Institute of International Finance in Washington that "In Japan, inflation expectations are still below 2%, so we have to lift up expectations and continue to support economic activity," Shimizu said
• The BOJ confronts another uncertainty unique to Japan, which is unaccustomed to positive interest rates after experiencing a prolonged era of low inflation and rates.
• Japan's central bank exited a decade-long, massive stimulus program last year and raised its key interest rate to 0.5% in January on the view that the country was on the cusp of durably hitting its 2% inflation target.
• While BOJ Governor Kazuo Ueda has signalled the central bank's readiness to keep raising rates, he has stressed the need to tread cautiously to scrutinise the economic impact of U.S. tariffs. The central bank’s next policy meeting is scheduled for October 29-30.

(Source: Reuters)