TOKYO, Sept 20 (Askume) – The Bank of Japan kept interest rates steady on Friday and lowered its consumption outlook, signalling its confidence it can revive prices if it keeps interest rates low in the coming months amid a solid economic recovery.
The market is paying attention to the signal sent by Governor Kazuo Ueda in the post-meeting press conference on the timing and pace of future interest rate hikes.
As widely expected, the Bank of Japan kept short-term interest rates steady at 0.25% at a two-day meeting that ended on Friday.
“Private consumption saw moderate growth despite the impact of rising prices and other factors,” the Bank of Japan said in a statement announcing the decision.
This assessment is more optimistic than the previous view that consumption is elastic.
The yen pared losses and the Nikkei Stock Average (.N225) pared gains after the news , as the Bank of Japan’s optimistic outlook kept market expectations alive for interest rate hikes in the near term.
“The Bank of Japan’s upgraded consumption assessment shows growing confidence that things are on track, and rising wages will boost household income and spending,” said Naomi Muguruma, chief bond strategist at Mitsubishi UFJ Morgan Stanley Securities.
“If incoming data further underscores the Bank of Japan’s optimism, we could see another rate hike in December,” he added.
Inflation goes up
The Bank of Japan ended negative interest rates in March and raised short-term rates to 0.25% in July, a historic shift in a decade-long stimulus program aimed at boosting inflation.
Ueda emphasized that if inflation continues to achieve the target of 2%, as currently forecast by the board of directors, the Bank of Japan is ready to raise interest rates.
If he repeated such aggressive communication at a press conference, it would be in stark contrast to the posture of many other central banks going into a rate-cutting cycle. The Federal Reserve cut borrowing costs on Wednesday.
Most economists surveyed by Askume expect the Bank of Japan to raise interest rates again this year, with most expecting a hike in December. None in the survey expected a rate hike this month.
Data released on Friday showed core consumer inflation reached 2.8% in August, rising for a fourth consecutive month, raising expectations of further interest rate hikes.
There will be an opportunity to examine more closely the data on which its forecasts are based at the Bank of Japan’s October 30-31 meeting, when the committee conducts its quarterly review of forecasts.
Japan’s economy grew at an annual rate of 2.9% from April to June, and real wages rose for two consecutive months in July, easing concerns that rising costs of living would hit consumption.
But the export-dependent country’s future looks bleak due to weak Chinese demand, sluggish US economic growth and the yen’s recent appreciation.
Market volatility remains a major concern for Bank of Japan policymakers as the yen surged and stock prices fell sharply following an interest rate hike in July and hawkish comments from Ueda.
Several BOJ policymakers have called for greater scrutiny of market activity in policymaking. But they also reiterated that the central bank is prepared to continue raising interest rates, with one hawkish board member saying short-term rates should eventually rise to about 1%.
