Bank of Japan Deputy Governor Himeno's Hokkaido Speech
Bank of Japan (BOJ) Deputy Governor Himeno provided insights into Japan's economic outlook, monetary policy, and regional economic conditions during a press conference and a speech in eastern Hokkaido on September 2, 2025. Given the next Monetary Policy Meeting taking place on September 18 & 19, 2025, we parse the speech for further clues on the bank's thought process.
Key themes include the ongoing impact of US trade policy, the trajectory of underlying inflation, the BOJ's cautious approach to rate hikes, and the strategy for reducing the BOJ's balance sheet. Himeno emphasized the need for careful monitoring of both upside and downside risks, particularly regarding global uncertainties and the delayed effects of tariffs. He also highlighted the resilience and unique growth characteristics of the Hokkaido economy.
US Tariff Impacts and Global Economy
The new U.S. administration's policies are characterized by a holistic approach, tactical flexibility, strategic persistence, and an unfettered perspective from conventional wisdom. Trade policy, for instance, reflects economic goals (optimal tariffs), foreign policy (economic security), and domestic political agendas (fairness, distribution).
The impact of US tariff policy on Japan is analyzed through four channels:
- Direct impact on Japanese exports: Tariffs can raise US selling prices or squeeze exporter profit margins, though effects can be delayed due to factors like front-loading exports or reliance on existing inventories. Japanese exporters may have greater pricing leeway due to the yen's depreciation.
- Uncertainty: Fluctuating tariff rates, particularly on countries like China and Southeast Asian economies, make it difficult for Japanese manufacturers to decide on production, export, and investment.
- Broader global slowdown: Tariffs could raise US import prices, increase inflation, dampen consumption, and constrain economic activity. The IMF projected lower global and US growth rates for 2025.
- Financial markets: Volatility was observed in early April.
While the Japan-US trade deal is a positive step, ongoing US-China negotiations and undecided sector-specific tariffs maintain global uncertainty. As of now, a material impact on Japan's macroeconomic indicators like export prices, industrial production, business sentiment, and wages has not been clearly seen. This suggests effects are either taking time to surface or are smaller than initially feared, though they could still prove larger.
The Bank of Japan's baseline scenario assumes tariff effects will eventually materialize, leading to a slowdown in overseas economies and a decline in domestic corporate profits, moderating Japan's economic growth, with downside risks currently deserving greater attention.
Inflation Outlook and Monetary Policy
The underlying inflation rate remains below 2% but is gradually rising and approaching 2%, though temporary stagnation from tariff impacts is possible before eventually stabilizing around the 2% target. This "underlying" rate excludes temporary fluctuations such as gasoline subsidies and surges in food and energy prices. While headline CPI was 3.1% in July, the CPI excluding food and energy was 1.6%. Assessing underlying inflation is complex, requiring multiple analytical approaches.
Alternative interpretations suggest potential upside risks to prices. These include Japan's labor shortages, evolving corporate pricing attitudes, and rising inflation expectations, which may create greater upward pressure on wages and prices than suggested by the output gap (a "steeper Phillips Curve"). A global shift from a deflationary 2010s to an inflationary 2020s, driven by deglobalization, demographic changes, and climate policies, also implies upside risks.
Conversely, downside risks include trade policy shocks moderating Japan's economy, potentially exerting downward pressure on prices and wages and stalling the wage-price interaction. A global economic slowdown could also depress commodity prices.
Regarding monetary policy, real interest rates are "significantly low" despite three policy rate hikes. If the baseline scenario unfolds, the Bank will continue to raise the policy interest rate to adjust the degree of monetary accommodation. Decisions will be made by carefully assessing the balance of both upside and downside risks for the economy and prices, without preconceptions. While the economic outlook has downside risks for fiscal years 2025 and 2026, price outlook risks are considered roughly balanced. Central bank independence and accountability are crucial for currency credibility. Responses to demand versus supply shocks are not mechanical; demand shocks are generally easier to judge, while supply shocks require more careful consideration.
Balance Sheet Reduction
The Bank of Japan plans to gradually reduce its government bond (JGB) purchases, from approximately 6 trillion yen per month to 3 trillion yen by spring 2026, and further to 2 trillion yen by spring 2027. This reduction is expected to gradually decrease the Bank's total JGB holdings as they mature.
Considerations guiding this plan include:
- Limited direct effects on prices: The relationship between money growth and inflation is unstable at low inflation levels.
- Impact on economic activity: Short-term interest rates have a larger impact on the real economy than medium- or long-term rates, making the policy rate the primary tool for easing or tightening.
- JGB market functioning: High Bank holdings (exceeding 50% for individual issues) negatively affect market functioning by widening bid-ask spreads and reducing trading volumes. Reducing holdings is desirable, but hasty reductions could harm market stability.
- Banking system stability: Excessive reserve balances held by financial institutions at the Bank may pose risks, warranting exploration of JGB purchase amounts consistent with appropriate reserve levels.
- Bank's financial position: Reducing the balance sheet size is prudent for maintaining confidence and minimizing risks.
For exchange-traded funds (ETFs) and Japan real estate investment trusts (J-REITs), whose purchases were discontinued in March 2024, the Bank's policy for disposal is to consider market conditions for appropriate compensation, avoid losses for the Bank, and minimize disruptive market impacts. This approach was successfully applied to stock disposal and will serve as a reference, although ETFs and J-REITs differ in market information and scale of holdings. No specific timing for beginning such operations has been set.
Norbert Gehrke
