Key Moments
- BoJ policymaker Toichiro Asada stated that rising oil prices have created upside risks to inflation during European trading hours on Wednesday.
- Asada warned that higher energy costs are also weighing on growth and contributing to a stagflationary trend that is difficult to manage with monetary policy alone.
- The Japanese Yen showed no immediate reaction to Asada’s remarks, with USD/JPY trading lower near 158.50 as of the time of the comments.
Asada Highlights Oil-Driven Inflation Pressures
Bank of Japan (BoJ) policymaker Toichiro Asada said during European trading hours on Wednesday that higher oil prices have prompted upside inflation risks.
According to Asada, elevated energy costs are not only contributing to stronger price pressures but are also weighing on economic activity, resulting in what he described as a stagflationary trend.
Stagflation Poses Policy Dilemma
Asada characterized the policy response to stagflation as particularly complex. He noted that addressing such a situation is a difficult question for monetary authorities.
He stated that, in general, policymakers can respond to stagflation with a combination of fiscal and monetary measures. However, he emphasized that it is challenging to manage the economy using monetary policy alone.
Asada contrasted the current backdrop with an earlier period in which the BoJ had been able to concentrate on maintaining very accommodative settings to overcome deflation. He remarked that Japan is now experiencing inflation, suggesting that the previous approach may no longer be appropriate.
Market Reaction: Yen Steady After Comments
There was no immediate reaction in the Japanese Yen (JPY) following Asada’s remarks. As of writing, USD/JPY trades lower to near 158.50.
| Asset | Reaction to Asada’s Comments | Level Reported |
|---|---|---|
| USD/JPY | No immediate response | Trades lower to near 158.50 |
Bank of Japan: Mandate and Policy Framework
The Bank of Japan (BoJ) is the Japanese central bank, responsible for setting monetary policy in the country. Its mandate is to issue banknotes and conduct currency and monetary control to achieve price stability, defined as an inflation target of around 2%.
The BoJ embarked in an ultra-loose monetary policy in 2013 in order to stimulate the economy and fuel inflation amid a low-inflationary environment. The bank’s policy is based on Quantitative and Qualitative Easing (QQE), or printing notes to buy assets such as government or corporate bonds to provide liquidity.
In 2016, the bank further loosened policy by first introducing negative interest rates and then directly controlling the yield of its 10-year government bonds. In March 2024, the BoJ lifted interest rates, effectively retreating from the ultra-loose monetary policy stance.
Impact on the Japanese Yen
The Bank’s massive stimulus caused the Yen to depreciate against its main currency peers. This process exacerbated in 2022 and 2023 due to an increasing policy divergence between the Bank of Japan and other main central banks, which opted to increase interest rates sharply to fight decades-high levels of inflation.
The BoJ’s policy led to a widening differential with other currencies, dragging down the value of the Yen. This trend partly reversed in 2024, when the BoJ decided to abandon its ultra-loose policy stance.
Why the BoJ Began Unwinding Ultra-Loose Policy
A weaker Yen and the spike in global energy prices led to an increase in Japanese inflation, which exceeded the BoJ’s 2% target. The prospect of rising salaries in the country – a key element fuelling inflation – also contributed to the move.
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