BOJ to keep policy steady, signals more rate hikes Reuters

By Leica Kihara

TOKYO (Reuters) – The Bank of Japan is set to keep monetary policy steady on Friday, but expressed confidence that solid wage growth and consumption will allow the central bank to raise interest rates again in the coming months.

Such a brutal communication would contrast with many other central banks now moving into a rate-cutting cycle, including the US Federal Reserve, which offered an outsized cut in borrowing costs on Wednesday.

The divergence may cause more turbulence in markets, with expectations of narrowing US-Japan interest rates already helping the yen recover to around 143 against the dollar from a near three-decade low of 161.99 hit in early July.

Markets are focused on any clues from Governor Kazuo Ueda on the timing and pace of future rate hikes at his post-meeting news conference.

“Having just raised interest rates in July, the BOJ will likely prefer to scrutinize market developments for now,” said former BOJ official Nobuyasu Atago.

“It is natural to think that the next rate hike will come in December,” so the BOJ can assess the impact of the Fed’s rate cut, as well as political events such as Japan’s ruling party leadership race and the U.S. presidential election, he said.

At a two-day policy meeting ending on Friday, the BOJ is expected to hold short-term interest rates steady at 0.25 percent and maintain its view that the economy will continue to recover moderately as rising wages support consumption.

Most economists polled by Reuters expect the BOJ to raise interest rates again this year, with most betting on a December hike. None in the survey projected a rate hike this month.

The BOJ ended negative interest rates in March and raised short-term rates to 0.25 percent in July, in a landmark shift from a decade-long stimulus program aimed at boosting inflation.

Governor Ueda underlined the BOJ’s willingness to raise interest rates further if inflation remains on track to sustainably reach its 2% target, as the board currently projects.

A chance to check the data more closely against such forecasts would come at the BOJ’s Oct. 30-31 meeting, when the board will conduct a quarterly review of its forecasts.

Japan’s economy expanded by an annual 2.9% in April-June and real wages rose for two straight months in July, easing fears that rising living costs will hurt consumption.

But weak demand in China, slowing US growth and the yen’s recent rebound are dimming the outlook for the export-dependent country.

Market volatility remains a key concern for BOJ policymakers after July’s rate hike and sweeping remarks from Ueda sparked a rally in the yen and sharp declines in stock prices.

Several policymakers in the BOJ called for careful scrutiny of market movements in policy setting. But they also reiterated the bank’s willingness to keep raising interest rates, with one board member saying short-term rates must eventually reach around 1%.