Developments in the Natural Rate of Interest and the Assessment of the Degree of Monetary Accommodation

The natural rate of interest is defined as the level of the real interest rate that is neutral to economic activity and prices, and it is an important concept in the conduct of monetary policy. Following the recent revision of the GDP benchmark, the Bank of Japan has re-estimated the natural rate of interest using the latest data. As before, the estimates display considerable dispersion. Given such uncertainty in the estimation, when assessing the degree of monetary accommodation, the Bank -- similarly to the approach taken by central banks in the United States and Europe -- needs to make a comprehensive judgment. This involves not only looking at the relationship between the real interest rate and the natural rate of interest but also carefully examining economic activity, prices, and financial developments. In doing so, it is critical to examine a wide range of indicators related to financial conditions, which can be considered to serve as a transmission channel of monetary policy to the real economy. These include funding costs, the availability of funds, asset prices, and funding volumes.