Deputy Governor Ryozo Himino of the Bank of Japan delivered a speech in Saitama, Japan, discussing the country's economy and monetary policy. He highlighted four key factors affecting the Japanese economy: the Middle East conflict, AI-related demand, foreign exchange rates, and financial conditions. The conflict has led to a rise in crude oil prices, exerting downward pressure on the economy and upward pressure on prices. However, the Bank of Japan's concerns over a significant economic downturn have diminished, and the economy is expected to continue growing moderately, albeit at a decelerated rate.
The increase in global AI-related demand is driving upward pressure on both the economy and prices. The import price index rose by 17% year-on-year in July, while the export price index increased by 10% year-on-year. The depreciation of the yen has both upward and downward effects on the economy, while pushing prices upward. Financial conditions remain accommodative, with real interest rates remaining negative and financial institutions maintaining an aggressive lending stance.
The Bank of Japan raised its policy rate to 1% in June, the highest level in 31 years. Deputy Governor Himino explained that the rate hike is an adjustment in the degree of monetary accommodation, not a tightening. He emphasized that the Bank will continue to raise the policy interest rate and adjust the degree of monetary accommodation in accordance with developments in economic activity, prices, and financial conditions.
The inflation rate remained below the price stability target of 2% in the first half of the year, but it is expected to move up and stay above 2% in the second half of fiscal 2026. The Bank of Japan will closely monitor the outlook for economic activity and prices and make policy decisions based on the likelihood of the baseline scenario being realized and the risks involved.
Deputy Governor Himino also discussed the challenges of communicating monetary policy decisions, citing the need to consider multiple perspectives, time horizons, and potential external scenarios. He emphasized that monetary policy has an impact on financial markets, economic activity, and prices across various time horizons and that the Bank must monitor current economic and price conditions and assess the baseline scenario for the outlook and the risks involved.