Kato calls for cautious normalization of BOJ policy as inflation rises in Japan

According to Katsunobu Kato, a senior member of Japan’s ruling party, conditions are shaping up for the Bank of Japan (BOJ) to normalize monetary policy. Kato, a former chief cabinet secretary, stated that as prices and wages start to rise in Japan after years of stagnation, it is logical for monetary policy to return to its traditional state in which interest rates move in line with market demand. However, Kato cautioned that the BOJ should monitor economic developments closely and coordinate carefully with the government before deciding to raise interest rates. He expressed concern about the effect of the weak yen on inflation rather than its level. The BOJ ended its eight-year experiment with negative interest rates in March, citing signs that inflation would persistently reach the 2% target, thanks in part to rising wage pressures. Since then, the central bank has hinted that additional rate increases are probable, in keeping with market expectations for another rate hike by the end of the year. A faster-than-anticipated tightening of monetary policy might moderate the yen’s slide. The weak yen has had a detrimental impact on imported raw materials, causing damage to consumption and causing difficulties for policymakers attempting to stabilize the fragile economic expansion. Kato remarked that the yen’s recent weakness was not solely attributed to interest rate disparities between Japan and other nations but also to underlying structural changes in Japan’s economy. Many Japanese manufacturers have relocated production overseas, resulting in a decrease in export growth as a result of a weak yen. As a result, Kato urged Japan to enhance its economy by promoting foreign investment. (Source: Reuters)