By Leika Kihara
TOKYO- Japan’s improving economic conditions and receding US recession worries are likely to bring prospects of a December or January interest rate hike back into view, even as a new government complicates the politics around monetary policy.
A significantly dovish shift in rhetoric from Bank of Japan Governor Kazuo Ueda and surprising opposition to further rate hikes by new Prime Minister Shigeru Ishiba have cast doubts over when the central bank would next tighten policy.
Despite the recent change in mood around policy, however, sources and analysts see a growing economic case for the central bank to take Japan’s rates further away from historic lows and for the BOJ to step up its hawkish signaling.
While the BOJ is expected to keep interest rates steady at its Oct. 30-31 meeting, it will roughly maintain its forecast for inflation to stay around its 2 percent target through March 2027, say three sources familiar with its thinking.
Former BOJ official NobuyasuAtago, who is currently chief economist at Rakuten Securities Economic Research Institute, said the central bank is unlikely to want to wait until March to raise rates again.
“Recent developments surrounding the US economy, including receding risks of a severe downturn, will work in favor of further BOJ rate hikes. From that perspective, the chance of a near-term rate increase is heightening,” Atago said.
“I don’t think the Ishiba administration would push back against the BOJ’s efforts to raise interest rates.”
With inflationary pressure from import costs subsiding, Ueda has said the central bank can “afford” to spend time scrutinizing risks, such as unstable markets and US economic uncertainties, in timing the next rate hike.
But that does not necessarily mean the BOJ will stand pat for a prolonged period, especially if conditions for a rate hike fall into place, the sources say.
Many BOJ policymakers see the economy on track for a moderate recovery with higher wages underpinning consumption and helping sustain broad-based price rises, the sources say, meeting the prerequisite of further rate hikes.
“It’s true the BOJ is in no rush” with few signs inflation is firing up, one of the sources said. “But that doesn’t mean it will unnecessarily delay the next rate hike.”
“What the BOJ is likely trying to do is to give itself a bit of wiggle room on when to change policy,” another source said on Ueda’s comment.
The BOJ ended negative interest rates in March and raised short-term borrowing costs to 0.25 percent in July, taking a landmark shift away from the decade-long radical monetary stimulus of the previous governor.
Uncertainty over Ishiba’s stance on monetary policy and the risk of renewed market volatility from the US Federal Reserve’s fresh rate-cut cycle have heightened challenges for the BOJ to nudge rates up again.
From a macroeconomic perspective, however, the BOJ has few reasons to pause.
Base salaries rose at the fastest pace in nearly 32 years in August, reflecting this spring’s labor-management pay negotiations that led firms to deliver bumper pay hikes.
Growing prospects of sustained wage increases are prodding more service-sector firms to hike prices, a BOJ report showed, heightening the chance of a broad-based rise in inflation.
While slowing US and Chinese demand cloud the outlook, the headwinds have yet to hit manufacturers, with a quarterly central bank survey showing the business mood holding up and companies retaining robust spending plans. – Reuters
