BOJ likely to keep hawkish policy stance, raise rates next week, sources say By Reuters
Written by Leika Kihara
TOKYO (Reuters) – The Bank of Japan is likely to raise interest rates next week to prevent any market shock when U.S. President-elect Donald Trump takes office, and keep a promise to keep raising borrowing costs if the economy continues to recover, five people said. sources familiar with its thinking.
However, the central bank is unlikely to give clear guidance on the pace of future rate hikes or how much it might raise, the sources said.
Under its current guidance, the BOJ promises to continue raising the short-term policy rate if economic development and prices move in line with its forecasts.
“For the BOJ, there is not much to add or change in this guidance given the very low real interest rates,” one of the sources said, a view echoed by another source.
Governor Kazuo Ueda and his deputy said earlier this week that the BOJ would debate whether to raise interest rates, signaling its intention to take borrowing costs higher at the Jan meeting. 23-24 unless Trump’s first speech on Monday lifts markets.
As a result, markets are pricing in more than an 80% chance of raising short-term rates from 0.25% to 0.5% next week, which would bring the BOJ’s policy rate to levels not seen since 2008.
Unless Trump’s speech or any orders he issues next week cause significant market disruption, the BOJ is likely to continue hiking rates, the sources said, speaking on condition of anonymity because they were not authorized to speak publicly.
“The market seems to have received the BOJ’s message,” said one of the sources.
“While a hike next week is not a done deal, the only remaining hurdle is what Trump might say and how markets might react,” another source said.
With a hike next week seen as a near certainty, market attention is shifting to any clues the BOJ may provide on the pace and timing of further hikes.
While many analysts expect the BOJ to raise rates to 0.75% in the final quarter of this year, the bank is unlikely to give much indication during its next move, sources said.
The BOJ also has no plans, at least for now, to provide data on Japan’s neutral rate in addition to labor estimates that indicate it is in the range of -1% to 0.5% on an inflation-adjusted basis.
Staff estimates mean that if inflation expectations were to stabilize at the BOJ’s 2% target, the BOJ could raise its short-term rate to at least around 1% without slowing economic growth.
Ueda declined to specify the exact level of Japan’s neutrality, saying it was too difficult to come up with reliable estimates due to a lack of data.
Even if the BOJ were to raise rates next week, short-term rates would remain below neutral levels, the sources said, adding that it was too early to discuss any major change in its future policy direction.
“Given so much uncertainty about the outlook, it is impossible to plan in advance a clear path or pace” for future policy moves, a third source said.
The BOJ ended negative interest rates in March and raised its short-term rate target to 0.25% in July on the outlook for Japan that was on track to consistently meet the bank’s 2% inflation target.
Ueda has shown a willingness to raise prices further if the increase in wage increases emphasizes consumption and allows companies to keep prices rising not only for goods but also for services.
