BOJ Board Member Advocates Policy Normalization to Avert Market Distortions

Junko Koeda Urges Policy Normalization in Japan

Junko Koeda, a board member of the Bank of Japan (BOJ), emphasized on Thursday the importance of the central bank continuing its monetary policy normalization efforts. She underscored the need to raise real interest rates to an "equilibrium state" to prevent unforeseen market distortions in the future.

This statement suggests that Koeda, an academic who joined the BOJ's policy board in March 2025, would vote in favor of any interest rate hike proposals put forth by BOJ Governor Kazuo Ueda in the coming months.

Reasons for Koeda's Support of Policy Normalization

Koeda clarified that corporate profits remain high, the economy demonstrates resilience, and price performance is "relatively robust." She added that recent food price increases could influence inflation expectations.

She also noted that the current output gap is around 0%, and labor shortages have led to a tight labor market.

"Under these circumstances, the BOJ must continue to raise policy interest rates and adjust the degree of monetary easing in accordance with improvements in economic activity and prices," Koeda stated in a speech.

Background on BOJ's Monetary Policy

Last year, the BOJ exited its decade-long massive stimulus program and raised interest rates twice – including once in January of this year. Since then, despite core consumer inflation remaining above the 2% target for more than three years, the central bank has kept policy interest rates steady at 0.5%.

Comparison of Real Interest Rates

Koeda mentioned that Japan's real interest rates are "significantly low" compared to other countries, so even a slight increase in nominal interest rates would allow the central bank to continue stimulating consumption and investment.

She emphasized that "the BOJ needs to proceed with interest rate normalization, that is, returning real interest rates to an equilibrium state, to avoid unforeseen market distortions in the future."

Governor Ueda's Stance

Governor Ueda had previously stated that if he is confident that core inflation will stabilize near the 2% target, the BOJ will continue to raise interest rates.

Market Anticipation and Potential Impacts

The market is closely watching for monetary policy signals from the BOJ: Prime Minister Sanae Takaichi has expressed dissatisfaction with the idea of raising interest rates again recently and urged the central bank to cooperate with the government's efforts to reflate the economy.

However, because long-term low interest rate expectations have led to a significant depreciation of the yen, Finance Minister Satsuki Katayama stated on Wednesday that she does not oppose a moderate path of interest rate hikes by the BOJ.

"I think core inflation is about 2%," Koeda said, adding "But to achieve the price target, the essential thing is to assess how stable or anchored core inflation is."

She also mentioned that examining whether inflation expectations are stable and monitoring economic developments that affect prices are equally important.

Monitoring Labor Market Developments

Ueda said that the central bank needs more clarity on the outlook for wage negotiations next year. Koeda said she is also monitoring Japan's minimum wage, winter bonus payments, and the potential impact of increased labor mobility on wages.

Upcoming BOJ Meetings

The BOJ is scheduled to hold its next monetary policy meeting from December 18-19, followed by another meeting in January. Two of the BOJ's nine board members had proposed raising interest rates to 0.75% in September and October, but this was not approved, a sign that the central bank's attention to inflationary pressures is increasing.

Economist Expectations

A Reuters poll showed that a slim majority of economists believe that the BOJ will raise interest rates at the upcoming December meeting, pushing forward the goal of normalizing monetary policy supported by the recent depreciation of the yen.

Economists said that the conditions for raising interest rates are gradually maturing, and the depreciation of the yen further reinforces this idea. The yen fell to a 10-month low against the dollar this week, while the yen against the euro hit a historic low.

In the survey conducted from November 11-18, 53% of economists (43 out of 81) predicted that the BOJ would raise short-term interest rates from 0.50% to 0.75% at the policy meeting to be held from December 18-19. All 69 respondents who provided forecasts predicted that borrowing costs would reach at least 0.75% by the end of March next year. The median forecast for interest rates by the end of 2026 was 1.00%, which is in line with the results of last month's survey.

"With the depreciation of the yen, the market is also concerned about upward price pressures caused by imported inflation," said Takeshi Minami, chief economist at the Norinchukin Research Institute. "We expect the BOJ to raise interest rates as soon as possible, and this is a slight adjustment to the degree of monetary easing."

Impact of Yen Depreciation

The yen has been the worst-performing currency in the Group of Ten (G10) in recent months, raising expectations that Japanese authorities may intervene in the foreign exchange market to provide support.

Minami pointed out that although Japan experienced an economic contraction in the July-September quarter that was the first in six quarters, this was mainly due to special factors, and underlying private demand remains robust.

Harumi Taguchi, chief economist at S&P Global Market Intelligence, said that the probability of raising interest rates in December is very high if wage growth momentum is confirmed and coordination with the Takaichi government is smooth.

In the survey, 81% (25 people) of the 31 economists who answered additional questions said that they believe that wage growth in next year's wage negotiations will not exceed this year's 5.25%, which is higher than 76% in September. The median of the 28 economists who provided relevant forecasts was 4.9%, which is higher than 4.8% in September.

Jun Inoue, senior economist at Mizuho Research Institute, said that the pace of wage growth in 2026 will remain high supported by strong corporate profits.

"However, since manufacturing profits may be lower than expected, overall corporate profits are expected to decline slightly, so wage growth in 2026 is expected to be lower than in 2025," he said.