By Leika Kihara
TOKYO- The Bank of Japan is leaning toward keeping interest rates steady next week as policymakers prefer to spend more time scrutinizing overseas risks and clues on next year’s wage outlook, said five sources familiar with its thinking.
Any such decision will heighten the chance of an interest rate hike at the central bank’s subsequent meeting in January or March, when there will be more information on the extent to which wage hikes will broaden next year.
There is no consensus within the central bank on the final decision, with some in the board still believing Japan has met the conditions for raising rates in December, the sources said. The decision will depend on the conviction each board member holds on the likelihood of Japan achieving sustained, wage-driven price rises.
There is also a slim chance the board may favor acting if upcoming events, such as the US Federal Reserve’s rate-setting meeting that concludes hours before that of the BOJ, trigger a renewed yen plunge that heightens inflationary pressure.
But overall, many BOJ policymakers appear in no rush to pull the trigger with little risk of inflation overshooting despite Japan’s still near-zero borrowing costs, they said.
“Japan isn’t in a situation where imminent rate hikes are needed,” one of the sources said. “With inflation benign, it can afford to spend time scrutinizing various data,” another source said, a view echoed by two more sources.
The BOJ will hold its final policy meeting for the year on Dec. 18-19, when the nine-member board will deliberate whether to raise short-term interest rates from the current 0.25 percent.
Just over a half of economists polled by Reuters last month expect the BOJ to raise rates in December. About 90 percent forecast the BOJ to have hiked rates to 0.5 percent by end-March.
By contrast, markets are currently pricing in less than a 30 percent probability of a rate increase in December.
The central bank has been guarded on the timing of the next rate hike, causing market expectations of a move to fluctuate between December and January.
There is growing conviction within the BOJ that conditions for another hike are falling into place with the economy growing moderately, wages rising steadily and inflation exceeding its 2 percent target for well over two years, the sources said.
In a sign of its confidence over the economic outlook, the central bank is likely to maintain its view that consumption is “increasing moderately as a trend,” they said.
But there is no sense of urgency to hike as inflationary pressure from raw material imports has subsided due to the yen’s recent rebound. That contrasts with when the BOJ hiked rates to 0.25 percent in July, when the currency’s rapid fall pushed up import prices and heightened the risk of an inflation overshoot.
While rising wages are prodding more firms to hike services prices, such moves have not heightened enough to cause an alarming wage-inflation spiral, the sources said.
Acting in December, rather than January, could give markets the impression the BOJ is in a rush to push up rates to levels deemed neutral to the economy – something it wants to avoid.
The government, which still considers Japan as remaining in economic stagnation, also prefers the BOJ to move cautiously. – Reuters
