I first met Sayuri Shirai when I started covering the Bank of Japan’s monetary policy meetings in Tokyo back when Haruhiko Kuroda was governor and she had recently left the bank as a voting member of the its policy board when it was fighting hard to get the economy out of deflation and back on the road to growth and yes, inflation.
Fast forward as this Keio University professor joins me to discuss the BOJ’s meeting this week where BOJ governor Kazuo Ueda has long since replaced Kuroda as the head of the central bank and after doing two rate hikes has paused and left the door open to more such moves if inflation stays definitively above its 2% target.
We start with the BOJ’s policy decision at this week’s meeting where, with Japan inflation above 2%, the central bank keeps policy steady, and markets, economists, cry “Hawkisk hold!” while Sayuri basically says, No way!
“I was very surprised to hear that some people took it as a hawkish message. Because first of all, yes, there were board members, who dissented in support for a rate hike, she says. “But it doesn’t mean, the bank, Japan’s policy stance, has changed. Nothing really has changed.”
In fact, Sayuri says Governor Ueda’s communication was actually dovish. “His explanation at the press conference was very dovish and then completely changed from March 19th, the previous meeting, because on March 19th, he was very, very hawkish.”
On inflation, Shirai notes a recent decline. “From January, inflation started to become below 2%. So, even for the March gasoline, price hike, still, much, headline inflation was 1.5%. So already for three months, inflation is below 2%.” She attributes this to policy changes and a weakening impact from yen depreciation, suggesting that the BOJ has less justification for raising rates than when inflation was under target.
Discussing the real interest rate, Shirai points out, “Like now…the policy rate is only 0.75%. And let’s look at the data: inflation which is 1.5%… Then just by simple mathematics… 0.75% minus 1.5%… is minus -0.75%. So it’s a negative.”
This negative real rate, she argues, is used by the BOJ to justify future hikes, though she questions how accommodative policy really is.
”So this is another way to justify the future rate hike. But to be honest, this -0.75% is almost similar to the, neutral rate, so it's not really accommodative, but by saying that, I think was trying to say, what does this do for the future interest rate hikes?
So dive in and hear more about where the BOJ is now, and what she sees as the drivers as it moves ahead.
Negative real rate so why not hike? 00:07:35:22
Yeah. So like now, you know, policy rate is only 0.75%. And let’s look at the data inflation which is 1.5%. Then just by, you know, simple mathematics. So 0.75% -1.5. So -0.75%. So it’s a negative. And then for many years we are having negative, you know, we are interesting in terms of policy thing that is, you know, a reason why, governance, where the I keep saying and the other interest rate is in a negative territory, so still accommodative, I think, by saying that, if it’s very accommodative, why not raise interest rates?
The rate is negative but also close to the neutral rat e 00:08:19:07
So this is another way to justify the future rate hike. But to be honest, this -0.75% is almost similar to the, neutral. It so it’s not really accommodative, but by saying that, I think DOJ was trying to say, do for the future interest rate hike.
¥160 is a serious marker 00:09:28:09
I think yen. You know, reaching ¥160 is quite, quite serious concern because, you know, all these things started when the Federal Reserve started to raise interest rate, in, I think in March 2022 at that time. Now, there are any rate, there was 115.
Expensive imports! 00:09:50:04
Can you imagine almost all, you know, we all import, you know, from abroad and everything becomes so expensive, so. Well, 160 is a bit too much. And then if you look at past, say 2000, 2020, two and 2024 that time, the Ministry of Finance, of Japan intervened in foreign exchange market by selling us stocks and buy Japanese yen to support Japanese yen.
160 last point of intervention 00:10:18:12 -
Okay. So you can, so, you know, and then in 2024, last I went to intervene, and they intervened as 160. So that’s why I market always pay attention to the and the $1 equal to 160 yen, like, so now, after, April 28th meeting, exchange rate didn’t move much. Okay. And then and after the dollar reserves, you know, meeting and press conference, it was clear that you know, under, Powell, interest rate would be, maintained. Then I think, people started to, consider. Okay, so then, you know, yeah, you’d stay, you know, maintain and fidelity job and Bank of Japan maintain the interesting thing in other sectors started to depreciate today. And, and then it started it moved up to the 160. Well, so then I thought it this is a dangerous move.
160 a sensitive spot 00:11:12:24
So I think this was a difficult time under governor Ueda,. This evening in Tokyo time, you know, Finance Minister Katayama suggested, you know, this is a very speculative move. And they, you know, you know, we might take a decisive action. So some kind of, intervention in the foreign exchange market, maybe in New York time. Or maybe late to check something happened, I think. Yeah.
JGBs and yen weakness correlation 00:12:29:11
Yes. Yeah. So this time you know it. What’s depreciating. And also you know Japanese long term debt. It was also going up and this kind of theme that there is some correlation between the increase in JGB long term yield and depreciation. This started from October last year when Takaichi became a prime minister because she always talked about expansionary fiscal policy and all.
Fiscal concerns were a catalyst for weakness, too 00:12:55:17
And then so when she became pronounced <PM>, you know, the market started to you know, you know, consider the expansionary fiscal policy. And then this went together with, setting sell off of yen. So, this time also, yen was depreciating today and also together with the moving up to 2.5%. So, so the government and the BOJ maybe worry not only in depreciation and the resultant inflation, but also it’s also some kind of recession.
No hurry-up to move policy 00:13:46:15
Okay. Because from the way I understood, from press conference, he didn’t really say, you know, he, he didn’t, I get a sense that he’s rushing, he gave a suggestion… No need still no need to hurry up. So, actually, I don’t know what people who really listen to the, you know, his Japanese, press conference <think>. So it was very, very dovish. Did not be like, like for quite a long time that these are interpretations. So when I hear from some people, including you and you see it as a hawkish, to be honest, that is not twhat most of the people understood, that it was very hawkish. That’s what I thought.
Mixed views 00:15:01:20
You know, that the city people are independent. So the independent, you know, not independent, board members, you know, and then, you know, the, the a governor and two deputy governor and then, a few people, quite neutral. And then most of the people in Japan, also go along with, governor with us view.
Dissent does not mean policy change 00:15:24:19
So just because the people dissent doesn’t mean the change in any policy, you know, stance. I don’t take it that way. And the because the way is people say that means it looks like a deal to some kind of agreement within the board member. Also, three people are suggesting rate hike. That’s not possible because everybody, not supposed to talk that way.
Postpone to June 00:17:22:05
So I’m not sure I, you know, this idea of postponing to June is really, that’s what the BOJ is thinking in their mind. And so let’s see what’s happens because, they had a downgraded economic growth rate to the, 0.5% this year, a very low growth, from 1%, 1% to 0.5%. And the other wages, down the positive in January and February.
Japan’s growth is challenged by price developments 00:17:46:18
But because of this inflation, it’s very likely that the other way to start to go down, possibly, turning into the negative territory again. So the economy is not very good. And then it’s a purely cost push… and then households are not happy and, you know, small and medium enterprises very, very difficult position this time. Not just the price hike, but there are some shortages in fuel and a certain product.
A lasting weak economy 00:18:09:08
So it’s quite the Japanese economy’s, quite weak. But I just wonder this kind of situation can change at any time from today, till June, I, you know, maybe, remain same. So it’s not clear, you know, by June, the BOJ, is going to, do the, later. It’s not clear.
Oil price shock is transitory… 00:19:28:05
It were at the FOMC right. Yes. Yes. So yeah I look at the statement it was very interesting this time. Three people mention about this it’s not about how do you call it easing bias. Right. They voted against easing bias. That was very interesting. But, you know, I think this situation is very different from Japan because, like, Powell mentioned in the press conference, he said, this oil price impact is transitory, temporary.
Betting on lower inflation in the US? 00:20:01:14
Right. And when I look at the, us market participant, projection about the US inflation, it looks like, you know, now, March CPI, US inflation is 3%, but gradually to start to go down, that is people’s view. Okay. If that is true, I think, you know, under new, Chairman, Kevin Walsh, I think there he, he may try to, do that late cut in quick ratio really starts to come down.
US case Vs Japan 00:20:32:09
It’s still like he said, the remaining inflation in US is quite right to be low. And or closer to 2%. So, USA is very different because they have, gas and oil and it also express is going up, but they have a supply capacity. But the Japan yen is super cheap, extremely cheap, and everything, everything is imported.
US inflation is more likely to be transitory 00:20:54:23
So Japan inflation is more persistent. And so US I think it’s, it’s possible, for the, for them to lower interest rate that is, might be okay.
Policy on hold…00:24:00:00
So, they can always discuss <policy>. So, I don’t know to what extent, this stance, a status quo, decision is influenced by government. We never know. But I think, government is really worried about this, you know, slow down economy. And so, maybe she had a similar feeling.
Sayuri Shirai, ADBI Fellow
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Sayuri Shirai
Joined Asian Development Bank Institute as an ADBI Fellow in October 2022
She is currently a professor of economics under Keio University’s faculty of policy management. She is also an advisor to both the Nomura Research Center for Sustainability and the Nissin Oillio Group.
From 2020-2021, she was a senior advisor to London-based EOS at Federated Hermes, which provides environmental, social, and governance (ESG)-related stewardship services on firms and public policy. Prior to that, she was an ADBI visiting fellow from 2016-2020, a member of the Policy Board of the Bank of Japan from 2011-2016, taught at Sciences Po in Paris from 2007–2008, and served as an economist at the International Monetary Fund from 1993-1998.
She has published extensively on topics such as central bank digital currency, monetary policy, global finance, and ESG investment. She is also a contributing writer to the Japan Times and a frequent Japanese and international media commentator on Japan’s economy and global monetary policies.
She holds a PhD in economics from Columbia University.
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