TOKYO, Sept 20 (Askume) – The Bank of Japan will keep monetary policy steady on Friday but said it believes wage growth and solid consumption will allow it to raise interest rates again in the coming months.
The positive communication stands in contrast to many other central banks that are currently going into a rate-cutting cycle, including the Federal Reserve, which cut borrowing costs on Wednesday.
The divergence could lead to further market turmoil as expectations of a narrowing U.S.-Japan interest rate differential are helping the yen rise from its lowest level in nearly three decades of 161.99 against the dollar in early July.
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.
Nobuyasu Atago, a former Bank of Japan official, said, “After raising interest rates in July, the Bank of Japan is more willing to temporarily review market developments.”
He added that “it is natural to think that the next rate hike will be in December” so that the Bank of Japan can assess the impact of the Fed’s rate cut as well as political events such as Japan’s ruling party leadership race and the US presidential election .
At a two-day policy meeting that ends on Friday, the Bank of Japan is widely expected to keep short-term interest rates steady at 0.25% and maintain the view that the economy will continue to improve modestly as rising wages boost consumption.
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.
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.
Governor Ueda emphasized that the Bank of Japan is prepared to raise interest rates if inflation continues to achieve the 2% target according to the committee’s current forecast.
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 by an annualized 2.9% from April to June, and real wages rose for two consecutive months in July, easing people’s 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 interest rate hikes 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%.
