02.02.202601:18:00UTC+00BoJ Downplays Behind-the-Curve Risk: January Meeting Summary

At its January meeting, the Bank of Japan evaluated the potential risk of falling behind in its monetary policy strategies. The summary of opinions indicated that this risk has not significantly increased. However, precise and timely policy implementation is becoming increasingly crucial. With real interest rates still substantially negative, and assuming the bank's projections for economic activity and inflation are accurate, additional rate hikes are considered appropriate. The board is assessing the impact of each policy decision on economic growth, inflation, and overall financial conditions, proceeding with a gradual tightening approach, while still maintaining highly accommodative policies amid the yen's weakness. Underlying inflation levels have approached the central bank's 2% target, justifying continued policy adjustments. Looking forward, changes in international interest rate environments could amplify the risk of policy lag. Japan continues to have one of the lowest real policy rates in the world, and the sensitivity of foreign exchange markets to interest rate disparities highlights the necessity of narrowing this gap. The current weakness of the yen and rising yields are largely attributable to economic fundamentals, signaling that timely interest rate hikes are an essential response.