BOJ Is Said to See Chance of Hike This Year Despite Politics
Bank of Japan officials are of the view that it may be possible to raise the benchmark interest rate again this year regardless of domestic political instability, as economic conditions have developed in line with expectations, according to people familiar with the matter.
The US-Japan trade deal has removed a key source of uncertainty, but the BOJ is likely to keep its rate unchanged at 0.5% when it next sets policy on Sept. 19, as officials are still assessing the economic impact of US tariffs both at home and abroad, according to the people. The bank’s policy board will also meet in October and December.
The yen extended gains and rose by 0.6% to 146.58 per dollar after this report, its strongest level since Aug. 22. Money markets now assign a 64% probability that the BOJ hikes rates by December, compared to 44% on Monday.
Prime Minister Shigeru Ishiba’s decision earlier this week to resign clouds the outlook both for politics and government policies, with some economists warning that a bid to shore up popular support could upend the ruling coalition’s fiscal discipline. Still, the economy has performed as expected, with steady progress toward the bank’s stable inflation target, and the trade deal signed last month removed some potential risks to growth, according to the people.
The officials see that the bank is making progress toward another rate hike after the last one in January. Some officials are even of the view that a hike might be appropriate as early as October, according to some of the people.
Japan’s revised GDP report this week confirmed moderate growth continues. Against that backdrop, overall corporate profits hit a record high last quarter and the labor market stayed tight, keeping upward pressure on wages across the industrial spectrum. Real wages turned positive for the first time in seven months in July, and even minimum wages are set to rise by the most on record this year.
Particularly following the US-Japan trade deal, examining economic data and information will be critical in the coming months as the bank is likely to be able to judge whether economic conditions are suitable for a rate hike, the people said.
Those views are slightly at odds with changing perceptions in the market earlier in the week, where pricing in the overnight swaps market as of Tuesday indicated a roughly 50% chance of a hike by year-end after news of Ishiba’s resignation, down from around 70% at the start of this month.
Sanae Takaichi, a top contender to be the nation’s next prime minister, last September said it would be absurd to raise rates at that time. She made the comments in the run-up to the previous party leadership election. With markets pricing in her possible victory, along with the potential for more fiscal spending no matter who wins, Japan’s stocks have risen and super long bond yields have stayed near record highs this week.
BOJ officials will be monitoring signals from the new government, particularly what sort of economic measures it might promise and then how those steps might affect economic growth, inflation and financial markets, the people said. Inflationary pressures could rise depending on the amount of fresh spending, possibly affecting the timing of the next rate hike, they said.
Japan’s inflation has stayed at or above the BOJ’s 2% target for more than three years. Last month US Treasury Secretary Scott Bessent said that the bank is falling behind the curve in tackling inflation, but BOJ Governor Kazuo Ueda has repeatedly denied that’s the case, noting underlying inflation is still below the bank’s goal.
The BOJ is also closely watching the course of the US economy including whether it can achieve a soft landing amid growing concerns after recent employment data, the people said.
A speech by Deputy Governor Ryozo Himino was taken as dovish by traders last week. Some officials interpreted his policy stance in the remarks as neutral, some of the people said.
Source : Bloomberg
