MNI BOJ WATCH: Ueda Opens Door To Dec Hike, Eyes U.S., Mkts

MNI (TOKYO) - Bank of Japan Governor Kazuo Ueda on Thursday left the door open to a rate hike in December, saying downside risks to the U.S. economy had fallen, but noting fresh risks stemming from next week’s presidential election.

“If the probability of achieving economy and prices increased, it will lead to a rate hike,” Ueda told reporters, noting recent strong U.S. data meant he did not need to repeat language on how the bank could afford to spend time monitoring risks. However, the bank has no pre-set course on raising the policy interest rate from 0.25%, he added, noting policymakers will examine rate hikes at each meeting based on available data.

Ueda’s comments followed the board’s largely anticipated decision to again hold the policy rate steady due to uncertainty on the economic, price and financial markets outlook, and despite inflation developing as expected. (See MNI BOJ WATCH: Board To Hold, Monitor Markets, U.S. Economy) The board last hiked the policy rate to 0.25% from a range of zero percent to 0.1% in July.

JGBs were little changed following the call, despite the Board reaffirming its commitment to raise rates if inflation targets are met, a pledge absent from its September meeting communications. Markets currently give a December hike a 33% chance and have priced in a .40% policy rate by the Jan 23-24 meeting.

U.S. FOCUS

Following the decision, the board noted the Bank must pay greater attention to overseas economies, particularly the U.S., and developments in financial and capital markets.

Ueda told reporters, while U.S. economic risk since August had fallen, the Bank would continue to monitor whether the economy continued to normalise. Financial market volatility had also fallen over the same period, but the impact of the U.S. election could impede a December hike, he cautioned.

“Falling risk linked to the U.S. economy could be a factor of raising the policy rate,” he suggested. “But if the risk stays at the level observed in August, the BOJ will not take the next step. Even if the risk falls considerably, the BOJ will not decide on the rate hike due to the factor alone.”

The weak yen will also likely have a greater impact on prices moving forward and the BOJ will examine the currency’s relationship with inflation further, he added.

The Bank's focus has shifted to how financial markets, particularly the dollar/yen rate, and stock prices evolve and whether the upside risk to inflation increases again in December.

Ueda noted the BOJ will also release a comprehensive review of monetary policy at the December meeting, however, this will not directly impact decisions.