Ryozo Himino: An economy with positive interest rates

Speech by Mr Ryozo Himino, Deputy Governor of the Bank of Japan, at the Hitotsubashi University Policy Forum, Tokyo, 30 January 2025.

The views expressed in this speech are those of the speaker and not the view of the BIS.

Introduction

After a quarter century with near zero or negative policy interest rates, the Japanese economy is transitioning to a state with positive rates. People have mixed feelings about a state that has been unknown for decades. Let me pose three questions regarding an economy with positive interest rates.

I. What Kind of Economy to Anticipate?

The first is the question of what kind of economy with positive interest rates to anticipate and what kind of path to pursue toward it. The difference between an economy with and without positive rates is not merely the presence or absence of positive rates. There are many possible forms of an economy with positive rates, and the path toward such an economy, including the causes and the speed of transition, can also be diverse.

To explore what can lie behind positive policy rates, I would like to begin with a conceptual framework for policy rate setting (Chart 1). First, let us assume that economic activity is affected by the level of the real policy rate, which is the nominal policy rate minus inflation expectations. A central bank will set its nominal policy rate to attain the desired level of the real policy rate.

The appropriate level of the real policy rate could be derived by adding to or subtracting from the natural rate of interest, the rate that is neutral to the economy, according to the policy stance toward how restrictive or accommodative the central bank desires its monetary policy to be. In the case of a central bank with a price stability mandate, the policy stance is set so as to bring the inflation rate in line with the price stability target.