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Using latest data, the estimate of the natural rate of
interest is around -0.9% to +0.5%That estimate is as of Q3 2025BOJ latest estimation is based on six models, including time-series and structural modelsAlthough the
range itself has not changed significantly, a closer look
reveals that many of the estimates have recently been
moderately on the riseThe rise reflects a rebound in Japan’s potential growth rate after the Covid pandemic and also an
environment in which wages and prices are both rising
moderately becomes entrenchedFull assessmentAll that being said though, the BOJ does note that “there are
many caveats when it comes to its (natural rate estimate) use in actual policy
conduct”. Adding that it is also still difficult to pin down the level of natural rate of interest in advance.But based on the statistical evidence, the BOJ will work with that to adjust the degree of monetary accommodation towards sustainably achieving its 2% price target.Once again, this looks to be just some added proof to cover all their bases. That after the releasing a new monthly core CPI estimate here yesterday.As mentioned then, the BOJ has come under quite a bit of scrutiny – not least from the Japanese government itself – on continuing to pursue the path of raising interest rates despite recent data showing some decline in underlying inflation pressures.So by estimating a higher level of the natural rate of interest, it is a signal that higher policy rates are needed to avoid conditions such as the economy overheating and/or to keep inflation in check.
This article was written by Justin Low at investinglive.com.
💡 DMK Insight
The Bank of Japan’s latest estimate of the natural rate of interest, hovering between -0.9% and +0.5%, is a critical indicator for traders right now. This range, projected for Q3 2025, suggests a persistent low-interest environment, which could influence both forex and bond markets significantly. With the BOJ relying on multiple models, including time-series and structural analyses, the stability of this range indicates that monetary policy will likely remain accommodative. Traders should keep an eye on how this impacts the yen, especially against major currencies like the USD and EUR. If the BOJ maintains its stance, we could see further depreciation of the yen, making it a prime candidate for short positions. On the flip side, if inflationary pressures rise unexpectedly, the BOJ might have to adjust its estimates, leading to volatility. Watch for any shifts in economic indicators that could prompt a reassessment of this range. Key levels to monitor include the 145-150 range against the USD, which could signal stronger trends in either direction.
📮 Takeaway
Keep an eye on the BOJ’s interest rate estimates; a shift could impact the yen significantly, especially if it breaks the 145-150 range against the USD.
