EXCLUSIVE: BOJ Reviewing Neutral Interest Rate

Tokyo, Dec. 4 (Jiji Press)–The Bank of Japan is reviewing the level of the so-called neutral interest rate, which neither stimulates nor cools the economy, informed sources told Jiji Press on Thursday. The central bank estimates that Japan’s neutral interest rate currently stands at between 1 pct and 2.5 pct. If the neutral interest rate rises and remains above the BOJ’s policy interest rates, it means that financial conditions are still accommodative, a situation leaving more room for the BOJ to raise interest rates further. Since it is difficult to specify the neutral interest rate, the BOJ presents it as a range based on the upper and lower ends of estimates from six models. The BOJ calculated the neutral interest rate in its comprehensive review of its monetary policy measures, conducted in 2024. As the data from that review has become outdated, the BOJ is slated to recalculate the neutral interest rate using the latest data, given the increase in the country’s potential growth rate. The central bank is widely expected to raise its policy interest rate from 0.5 pct to 0.75 pct at its next monetary policy meeting scheduled for Dec. 18-19. The policy rate is likely to come much closer to the lower end of the neutral interest rate. If the upper ends in most models are revised upward in the recalculation, it would mean that accommodative financial conditions may continue even after further interest rate hikes. Market participants have focused their attention on the pace of future interest rate increases by the BOJ. If an increase in the policy rate to 0.75 pct is seen as the end of the rate hike campaign for now, the yen’s depreciation may accelerate. However, if the neutral interest rate rises, there will be more room to raise rates without hindering economic growth, potentially curbing the yen’s depreciation. At a press conference in the central Japan city of Nagoya on Monday, BOJ Governor Kazuo Ueda said that the current level of interest rates is basically lower than the neutral rate. “In terms of how far away (the neutral rate and the policy rate) are, I’ll be a little clearer about my thoughts the next time we raise rates, if ever,” he said. END [Copyright The Jiji Press, Ltd.]