The Bank of Japan signals further moves in the market - real interest rates remain low

Members of the Bank of Japan’s board during last week’s meeting clearly emphasized that the current level of real interest rates in the country remains at historically low levels, opening the door to potential further actions in monetary policy.

Monetary Conditions Assessment

According to the summary of the discussion from the session ending December 19, at least one of the nine decision-makers maintains the position that the Bank of Japan’s current real policy rate is still the lowest compared to major economies. An observer expressed confidence that “the persistently low level of real borrowing costs requires consideration of further adjustments toward normalizing the country’s financial conditions.”

A Long Road to the Neutral Level

A key part of the discussion concerned the gap between the current regime and the so-called neutral interest rate. As noted by institutional representatives, current conditions are significantly below this benchmark. “The path to reaching the neutral level remains relatively long,” the official record of the meeting stated.

Implications for the Future Path

Signals from the meeting suggest that the Bank of Japan is monitoring inflationary pressures and economic growth dynamics across Japan, supporting the view that adjustments to the easing level may be necessary. The members’ statements are interpreted by markets as an indicator of readiness to take further normalization steps in the near future.