The Bank of Japan raised its policy rate to 1.25% at its 17–18 September monetary policy meeting, but financial conditions are still considered accommodative because real interest rates remain low.
The Bank of Japan held a monetary policy meeting on 17 and 18 September and decided to raise its policy rate from 1.00% to 1.25%. This is the highest level in approximately 31 years, since 1995.
The Bank of Japan’s explanation is often seen as contradictory, but the reason financial conditions are considered accommodative despite the rate hike lies in the “real interest rate.” The real interest rate is a measure calculated by subtracting the inflation rate from the nominal interest rate.
The headline consumer price index excluding fresh food rose 1.7% year on year in August. On a simple calculation, the real interest rate would be -0.45%, based on the 1.25% policy rate minus the 1.7% inflation rate.
However, estimates of the real interest rate based on expected future inflation are important. The Bank of Japan considers financial conditions to remain accommodative because short- to medium-term real interest rates remain low, demand for corporate financing is increasing, and financial institutions are taking a proactive approach to lending.