YEN WEAKNESS AND HOUSEHOLD PRESSURES
The BOJ’s rate hike comes against the backdrop of weakness in the yen, which has made imported goods more expensive and added to pressure on Japanese households.
While the exchange rate has not traditionally been the central bank’s main policy driver, economists said the yen is becoming increasingly relevant to its decisions because of the impact on inflation.
Yamaguchi touched on how a weaker yen could influence monetary policy by changing the inflation outlook.
“The yen development is one of the key factors which could deviate policy from our baseline,” he said, adding that persistent currency weakness could potentially prompt the BOJ to raise rates sooner.
Schulz said there is also a broader consensus that the yen has weakened too far.
Concerns about prices have become increasingly widespread in Japan, extending beyond economists and policymakers to businesses and households, he added.
“Households are very concerned about higher prices. They know that this is related … to the imported prices that are coming in,” he said.
Schulz said how quickly higher rates translate into lower inflation will depend partly on the broader policy mix in Japan.
The government can use fiscal policy to support domestic demand and household incomes, giving the central bank more room to focus on bringing monetary policy back towards normal levels, he added.
“Everybody needs to be on board for big changes, and the Japanese yen has been weakening for so long. Now sentiment has turned towards, ‘This went too far; we need to draw a line.’”