BOJ analysis may not be as dovish as Ueda’s cautious rhetoric suggests By Reuters

By Leica Kihara

TOKYO (Reuters) – Improving economic conditions in Japan and easing U.S. recession worries could bring back the prospect of an interest rate hike in December or January, even as a new government complicates policy around monetary policy.

A significant shift in rhetoric from Bank of Japan Governor Kazuo Ueda and surprising opposition to further rate hikes from new Prime Minister Shigeru Ishiba cast doubt on when the central bank will tighten policy next.

However, despite the recent shift in mood around policy, sources and analysts see a growing economic case for the central bank to move Japan’s rates away from historic lows and for the BOJ to step up its signalling.

While the BOJ is expected to hold interest rates steady at its Oct. 30-31 meeting, it will roughly maintain its forecast of keeping inflation around its 2 percent target until March 2027, three sources familiar with its thinking say.

Former BOJ official Nobuyasu Atago, who is currently chief economist at the Rakuten Securities Economic Research Institute, said the central bank was unlikely to want to wait until March to raise rates again.

“Recent developments around the US economy, including downside risks of a severe downturn, will work in favor of further rate hikes by the BOJ. From this perspective, the chance of a near-term rate hike increases,” Atago said.

“I don’t think the Ishiba administration would reject the BOJ’s efforts to raise interest rates.”

With inflationary pressure from import costs easing, Ueda said the central bank can “afford” to spend time looking at risks such as volatile markets and economic uncertainties in the US to determine the next interest rate hike.

But that doesn’t necessarily mean the BOJ will hold out for an extended period, especially if the conditions for a rate hike are met, the sources said.

Many BOJ policymakers see the economy on a moderate recovery path, with higher wages supporting consumption and helping to support broad price increases, the sources said, meeting the prerequisite for further rate hikes.

“It’s true that the BOJ is in no rush,” with little sign of inflation igniting, one of the sources said. “But that doesn’t mean it will unnecessarily delay the next rate hike.”

“What the BOJ is probably trying to do is give itself a little bit of wiggle room on when to change policy,” another source said of 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 from the previous governor’s decade-long radical monetary stimulus.

NAVIGATION OF UNCERTAINTIES

Uncertainty over Ishiba’s stance on monetary policy and the risk of renewed market volatility from the US Federal Reserve’s fresh rate-cutting cycle have added to the challenges for the BOJ to raise rates again.

From a macroeconomic perspective, however, the BOJ has little reason to stop.

Core wages rose at their fastest pace in nearly 32 years in August, reflecting wage negotiations between labor and management this spring that prompted firms to offer extraordinary pay increases.

Growing prospects for sustained wage growth are prompting more service sector firms to raise prices, a BOJ report showed, raising the chance of a broad-based rise in inflation.

While slowing demand in the U.S. and China cloud the outlook, headwinds have yet to hit manufacturers, with a quarterly central bank survey showing business sentiment holding up and companies maintaining solid spending plans.

Even external risks that Ueda highlighted in his recent dovish commentary, such as the US outlook and market volatility, appear to be diminishing.

Strong U.S. job growth suggests resilience in the world’s largest economy, easing a concern that Ueda cited as a reason to slow rate hikes.

Markets also regained some composure, with the average recovering most of its August loss. The yen is steady around 149 to the dollar, off a three-decade low near 162 hit in early July, but comfortably below the 140 threshold that, if breached, would hurt exports.

The BOJ’s quarterly outlook report, which follows its October 30-31 meeting, will provide clues as to how concerned the bank remains about overseas markets and risks. The key would be whether such risks are mentioned in the forward policy guidance portion of the report, the sources said.

After the October meeting, the BOJ meets for a rate review on December 18-19, followed by one on January 23-24.

The outcome of the general election scheduled for October 27 will also be crucial to the next rate hike.

Japan’s new economy minister Ryosei Akazawa on Tuesday backed the BOJ’s rate decision, dispelling views that the new administration would reject efforts to normalize monetary policy.

The likelihood of a rate hike in December or January could increase if Prime Minister Ishiba, previously seen as a political hawk, strengthens his hold on his ruling party with a solid election victory, some analysts say.

“Somehow the uncertainties always come out,” said a third source. “From here on out, the timing (of a rate hike) will almost be a judgment call.”