Let us consider the prognosis for monetary policy. For reference, we will use two approaches to analyse the unsecured overnight call rate level that would be neutral to the economy. First we will use the estimated potential growth rate and expected inflation rate to calculate this rate. As the BoJ pointed out in a statement after last week's meeting, the end of the zero interest rate policy does not signify any change in the bank's ultra-easy monetary policy. Moreover, through its zero interest rate policy, the BoJ was able to squeeze out every benefit of a financial easing in the implicit promise that it would not touch monetary policy for some time.
Financial markets are now likely to be much more sensitive to economic indicators.
Interest rates will remain extremely low even without the zero interest rate policy. Thus, if economic statistics continue to show an ongoing recovery, money markets and JGB markets should relatively quickly discount a second rate hike. The prevailing view in financial markets is that another rate hike is highly unlikely in the foreseeable future. The BoJ's monetary easing from 1991-95 was basically in response to the deterioration in the real economy. If the economy continues to move towards a self-sustaining recovery, the August 11 meeting of the Monetary Policy Council, at which the bank decided to halt the zero interest rate policy, will prove to have been a major turning point for monetary policy.