(Bloomberg) -- Former Bank of Japan Governor Haruhiko Kuroda signaled that the central bank has a lot of room to raise borrowing costs in its policy normalization process by offering a rough idea of the nation’s neutral interest rate.
“A nominal neutral rate, which the Bank of Japan is trying to gradually approach, could be less than 2%,” Kuroda said via video link at the Bund Summit in Shanghai Friday. “A short-term nominal rate may be less than 2%, maybe around 1.5% or maybe less than that.”
The neutral policy rate is the level of interest rates considered neither restrictive nor stimulative to economic growth. Economists estimate the BOJ will take its benchmark rate to 1% in the current tightening cycle, according to the median estimate in a Bloomberg survey last month.
In his remarks Friday, Kuroda refrained from articulating his idea for the exact level of how high the BOJ might be able to take interest rates as it unwinds decades of ultra-easy policy settings. Still, Kuroda’s remarks suggest the central bank has a long way to go, as its latest rate hike took the key rate to 0.25%.
The debate over the level of the nominal neutral rate is receiving growing attention now that the BOJ has embarked on a path to normalization that started when it ended the world’s last minus interest rate in March.
The neutral rate is an important reference in assessing how high a central bank’s rate can go, although it’s known to be very hard if not impossible to specify with absolute precision. Central banks don’t necessarily reach a neutral rate during a tightening cycle.
In line with the BOJ’s recent estimates, Kuroda said that Japan’s real natural rate is maybe around 0% or below. The BOJ published a paper last week proposing that Japan’s natural rate was somewhere between minus 1% and 0.5%. The nominal neutral rate can be viewed as the natural rate plus the inflation rate.
Current BOJ Governor Kazuo Ueda has said it’s too hard to pinpoint the natural rate, so the bank must raise rates by carefully examining the effects of every move, one at a time, and to determine the right level for the rate based on that analysis.
Kuroda launched the biggest monetary easing program in modern history in 2013 in a bid to shake off prolonged deflation. He stayed at the BOJ’s helm for a decade, becoming the longest serving governor in the BOJ’s history.
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