Japanese Government to Normalize Monetary Policy

Japan's ruling party heavyweight Katsunobu Kato has signaled increasing political support for further interest rate hikes, citing conditions aligning for the central bank to normalize monetary policy. Kato emphasized the need for the Bank of Japan (BOJ) to closely monitor economic indicators and collaborate closely with the government in determining the timing of rate increases.

According to Kato, Japan is transitioning from a period of stagnant prices and wages to one where both are on the rise, warranting a return to a monetary policy framework with positive interest rates aligned with market dynamics. However, he cautioned that the decision to raise rates would hinge on the strength of Japan's economy, particularly in terms of consumption, which may not be robust.

Regarding the yen's exchange rate, Kato expressed greater concern about its impact on inflation rather than its absolute level. He noted that over the past two years, the public has felt the pinch of rising inflation.

Kato's comments underscore the ruling party's heightened attention to the escalating cost of living, partly driven by a weaker yen, potentially facilitating the BOJ's argument for further interest rate hikes. The BOJ recently ended eight years of negative interest rates in March, reflecting increasing optimism that inflation will sustainably reach its 2 percent target, buoyed by wage growth.