Written by Leika Kihara
NAGASAKI, Japan (Reuters) – Japan’s central bank has room to raise interest rates but must move cautiously and slowly to avoid damaging the economy, a senior policymaker said on Thursday, reinforcing market sentiment that it will not rush to raise borrowing costs.
The comments by Bank of Japan board member Asahi Noguchi come a day after Japan’s new prime minister, Shigeru Ishiba, said the economy was not yet ready for inflation, with comments that weighed down the yen.
Noguchi said the yen’s recent rally from a “one-sided,” sharp fall seen in July moderated inflationary pressure from import costs, allowing the BOJ time to consider economic risks in deciding when to raise rates.
“If the economic development and prices go in line with our forecasts, we will adjust the level of financing, albeit slowly,” Noguchi said at a press conference, adding that the bank must make the decision “with great caution.”
“Since it is difficult to come up with a concrete estimate for Japan’s neutral rate, we need to pause after hiking once to assess the impact before raising rates again,” he said, adding the timing and speed of policy changes will depend on data.
Noguchi declined to comment on Ishiba’s speech but said the BOJ must consider that different political opinions reflect public sentiment, as it sets policy independently.
The dollar rose to more than a six-week high against the yen on Thursday, due in part to lower expectations of an imminent rate hike by the BOJ. It briefly touched 147.25 yen, its highest since Aug. 20, before returning some gains to stand at 146.80 yen.
Later on Thursday, BOJ Governor Kazuo Ueda, newly appointed finance minister Katsunobu Kato and economy minister Ryosei Akazawa met in Tokyo and confirmed that they will closely coordinate efforts to exit the recession.
“We also confirmed that we will make sure that we stop inflation and grow in a sustainable way as the government and the BOJ work closely with the joint statement,” Kato told reporters, referring to the 2013 statement committing the central bank to achieve its 2% target. inflation target.
Most economists polled by Reuters on September 4-12 expected the BOJ to raise rates again by the end of the year.
In a speech delivered earlier Thursday to business leaders in the southern Japanese city of Nagasaki, Noguchi said the BOJ should be patient in maintaining loose monetary policy.
With inflation exceeding the BOJ’s 2% target for more than two years and wages rising, Japanese firms are more willing to pass on higher costs through price hikes, he said.
But the real spending deficit suggests households still believe rates won’t rise much, having experienced decades of inflation and stagnant wage growth, said Noguchi, who voted for the BOJ’s decision to raise rates in July.
“It will take a long time for this noise to subside, and for the general public to shift to a mindset that is consistent with the BOJ’s 2% inflation target,” Noguchi said. “Until then, the most important thing is for the BOJ to remain patient with the financial situation,” he said.
The BOJ ended negative rates in March and raised short-term borrowing costs to 0.25% in July on the assumption Japan is making progress in stabilizing inflation at 2%.
BOJ Governor Kazuo Ueda was forced to backtrack on his words, which he made at the time of the July rate hike, that the bank would continue to raise borrowing costs after the hawkish tone sent shockwaves through the market.
Speaking after a meeting with Ishiba on Wednesday, Ueda said he told the Prime Minister that the BOJ will proceed carefully in deciding whether to raise interest rates.
Japan’s economy grew at a 2.9% annual rate in the second quarter as strong wage growth weighed on consumer spending. Capital spending continues to grow, although softer demand in China and slowing US growth are clouding the outlook for the export-reliant country.
