Bank of Japan Member: Japan is no longer in deflation; policy normalization must be cautious

The Bank of Japan’s Policy Board member Soichiro Takata clearly stated on the 26th: “There is a general recognition that the Japanese economy is no longer in deflation,” and emphasized that “concerns about a return to deflation have been eliminated.”

Takata said, “The path to overcoming deflation has finally taken shape,” and that current wage growth is being driven by domestic structural factors rather than relying solely on overseas cost transmission. “I hope Japan can experience a ‘true dawn’ this time; in other words, ‘this time is different.’” He called for the central bank to gradually adjust its policy narrative based on the premise that “price stability goals are close to being achieved.”

Regarding monetary policy operations, Takata advocates for further gradual interest rate hikes. He revealed that he proposed raising rates at the January meeting, reasoning that “Japan’s real short-term interest rates remain significantly negative,” even after a rate hike in December 2025, and are still well below overseas levels. He warned that if the global economy enters a recovery and rate-hiking cycle starting in 2026, the Bank of Japan risks “unintentionally falling behind the trend.”

However, normalization of policy must be cautious. Takata emphasized that reducing government bond purchases should proceed at a slower pace, noting that the central bank is “currently reviewing the scale of its balance sheet.” He warned that ultra-long Japanese government bonds face weak demand, and if market volatility becomes severe, “there is a risk of deterioration or even malfunction of the Japanese bond market.”

To this end, he proposed considering “flexible response measures” in extreme cases, highlighting his high regard for market stability. He called for the Bank of Japan to “carefully examine market conditions” during the mid-term review of its bond purchase plan in June and to maintain effective communication with the market to avoid triggering volatility beyond reasonable risk premiums.

Takata also warned of external risks: evolving U.S. trade policies are increasing global risk sentiment, and divergence in monetary policies between Japan and the U.S. could intensify foreign exchange market volatility. He emphasized, “We must closely monitor the risks arising from differences in monetary policy stances between Japan and overseas.”

Although acknowledging that the overseas economy is generally growing moderately, he believes Japan now has a foundation for endogenous inflation, “making it necessary for the central bank to focus more on rising prices. If overseas inflation factors combine, Japan’s CPI growth could exceed expectations.”

(Source: Xinhua Finance)