Bank of Japan to weigh ‘pros and cons’ of rate hike in December, governor Ueda says
The slow pace of hikes has been a factor behind a weakening yen
[NAGOYA] The Bank of Japan (BOJ) will consider the “pros and cons” of raising interest rates at its next policy meeting, governor Kazuo Ueda said on Monday (Dec 1), giving the strongest signal yet of a hike later this month.
The yen and bond yields rose after the remark as market participants priced in the likelihood of a rise at the Dec 18 to 19 meeting.
Ueda was sanguine on the economic impact of US tariffs, saying corporate profit remained elevated and uncertainty surrounding the outlook for domestic growth was diminishing.
With tariff impact worries receding, the likelihood of the central bank’s economic and price projections being met is increasing, Ueda said, signalling conditions for a hike were falling into place.
“The BOJ is at the stage where it should examine whether firms’ active wage-setting behaviour will continue”, which is key to how soon it will raise the policy rate, Ueda said.
Labour shortage is more acute, corporate profit is at a high level and the main corporate lobby has called on members to continue raising wages, he told business leaders in the city of Nagoya.
“We will examine and discuss economic and price developments at home and abroad, as well as market moves ... and consider the pros and cons of raising interest rates,” he added.
The yen extended gains on Monday, climbing 0.4 per cent to a session high of 155.49 per US dollar after Ueda’s remarks. The yield on the benchmark 10-year Japanese government bond rose four basis points to 1.84 per cent, the highest since June 2008.
“The remarks were clearly aimed at laying the groundwork for a December rate hike,” said economist Tsuyoshi Ueno at NLI Research Institute.
“The governor did leave himself some wiggle room to wait until January, depending on upcoming US economic data and domestic political developments.”
Not applying the brakes
With real interest rates deeply negative, another hike would still leave borrowing costs low and be tantamount to “easing off the accelerator” rather than “applying the brakes”, Ueda said.
The bank must be neither too late nor too early in raising its policy rate to ensure inflation smoothly achieves its 2 per cent target, he said.
The BOJ exited a massive, decade-long stimulus programme last year and raised its policy rate to 0.5 per cent in January on the view that inflation was on the cusp of sustainably meeting its 2 per cent target.
While the bank has kept the rate steady since, two of its nine board members proposed a hike in September and October as stubbornly high food prices keep consumer inflation beyond 2 per cent for well over three years.
A Reuters poll showed a slim majority of economists expect a rate hike in December. All project an increase to 0.75 per cent by March.
The slow pace of hikes has been a factor behind a weakening yen, which has been a headache for government policymakers concerned about higher import costs stoking inflation.
Asked about the yen on Monday, Ueda said that the weakness is likely to accelerate consumer inflation, a factor to which the BOJ must be vigilant in setting policy.
Renewed declines in the yen has raised the prospect of currency intervention, highlighting the administration’s concern over the negative impact of the currency’s fall.
Sources have told Reuters the BOJ is preparing markets for a possible interest rate hike as soon as December, reviving hawkish language as worries about sharp yen declines return and political pressure for the bank to keep its policy rate low fades. REUTERS
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