Tokyo: Qatar National Bank (QNB) expected the Bank of Japan to continue its gradual process of interest rate normalization, with two additional 25 b.p. hikes this year that would take the policy rate to 1 percent on the back of still-high inflation, an improving macroeconomic outlook, and the need to adjust accommodative financial conditions.
According to Qatar News Agency, QNB highlighted that the aftermath of the Covid-pandemic brought inflation across advanced economies to unprecedented levels. The combined effects of the pandemic, the Russia-Ukraine War, and the resulting supply and demand shocks led to multi-decade-high inflation. In response, major central banks like the U.S. Federal Reserve and the European Central Bank initiated aggressive monetary policy tightening cycles. However, the Bank of Japan (BoJ) remained an outlier, maintaining its negative short-term interest rate of -0.1 percent. This stance led to a significant depreciation of the Japanese Yen, affecting the country’s inflation rates.
QNB noted that after years of negative policy interest rates, the BoJ initiated its monetary policy normalization with a cautious 15 basis points hike in March 2024. Over the past year, the BoJ implemented additional hikes, bringing the policy rate to 0.5 percent. Despite the global trend towards easing, the BoJ is expected to continue its normalization process. Persistent inflation, which remains above the 2 percent target, and significant government spending measures are key factors advocating for further monetary policy tightening.
The Japanese economy is anticipated to recover this year, supported by favorable external demand and improvements in real income. The depreciation of the yen has bolstered the competitiveness of export-oriented industries and boosted tourism, which reached new heights in 2024 with 34 million visitors. Additionally, wage growth stemming from the “Shunto agreement” is enhancing purchasing power and supporting economic growth. These factors provide the BoJ with the opportunity to further increase policy rates.
Despite interest rate hikes, the BoJ’s monetary conditions remain accommodative, with the current policy rate still below inflation rates. This suggests that the real interest rate is negative, and the rate is also below the “neutral” level for the economy. Long-term interest rates, although rising, remain low, influencing business investment and household demand. The current macroeconomic context supports the BoJ’s move towards normalizing financial conditions.
QNB concluded that the BoJ is likely to implement further interest rate hikes to reach a 1 percent policy rate, driven by persistent inflation, an improving macroeconomic outlook, and the need to adjust accommodative financial conditions.