Global financial markets need Japan's benchmark interest rate to be returned to "normal," Reserve Bank of Australia Gov. Glenn Stevens said.
"It's fundamentally a distortion" to have Japan's interest rates as low as they are, Stevens said Friday in Queensland. "The sooner the Japanese interest rates are able to be normal again the better from the point of view of the global financial system."
The Bank of Japan's key interest rate is 0.5 percent, the lowest of any major economy. That has encouraged investors to borrow in Japan to buy higher-yielding assets abroad in so-called carry trades, weakening the yen. The yen has strengthened at least 4 percent against all 16 most-active currencies this week as a global rout in equities and emerging-market assets spurred investors to exit the trades.
"I'm not sure how soon that is going to be" for rates to be increased in the world's second-largest economy, Stevens said. "It seems to be a long slow process for normalization."
BOJ Gov. Toshihiko Fukui and his Policy Board colleagues decide on interest rates next week. The bank raised the rate from near zero percent in July 2006 as Japan emerged from more than seven years of deflation, and doubled it to 0.5 percent in February.
"You can see why it happened, with the experience Japan went through with the bubble economy, the deflation of asset prices and the serious credit problems they had," Stevens said. "I would have cut them to the same point if I had been in charge there, so it's not a criticism."