MNI INTERVIEW: BOJ Dec Rate Hike Hinges On US Outlook - Kameda

The Bank of Japan is likely to raise its policy interest rate further in December if financial markets and the Federal Reserve both foresee a soft landing for the U.S., former BOJ Chief Economist Seisaku Kameda told MNI. 

“Whether market players and the Fed agree with the outlook for the U.S. economy at the FOMC in November is the key for whether the BOJ will get a chance to raise the policy rate in December,” said Kameda, now executive economist at Sompo Institute Plus, the insurance giant’s research arm.

While the BOJ is unlikely to raise its overnight rate at its meeting this month, it is likely to signal a possible hike at the end of the year, Kameda said in an interview, noting that officials would be keen to avoid any repeat of what they now regard as a communications misstep following its July rate hike to 0.25%, which was followed by a steep appreciation of the yen.

The BOJ is increasingly confident of a moderate economic recovery, with solid private consumption, particularly after the September Tankan survey, Kameda said, though he added that he thought officials were now over-optimistic on the outlook for rising services prices, which would then feed through into higher wages.

HIKE PATH

Japan’s economy could absorb two more rate hikes without being derailed from its recovery track, said Kameda. However, he said this would mean that the BOJ would no longer be able to say with certainty that nominal rates were below the neutral level, given the difficulty of calculating neutral other than in retrospect.

Corporate inflation views captured in the Tankan, showing expectations in the process of anchoring, will be regarded by officials as “so far, so good”, said Kameda. The BOJ Board’s October Outlook Report is likely to maintain median forecasts for the core-core consumer price index until fiscal 2026 unchanged from its report in July, so long as October CPI data for Tokyo due on Oct 25 does not surprise with weak services prices, he added.

“Services prices and wages are rising constantly than before, and the wage-price virtuous cycle is strengthening. But services prices lack the strength to achieve the [BOJ]'s 2% target in a stable and sustainable manner,” Kameda said, noting that biannual corporate price revisions are also due in October.

WAGE GAINS

While major firms are considering raising wages next fiscal year on the back of favourable profits, he voiced concern over smaller firms.

“Wages at smaller firms are being influenced by those of major firms. However, I’m worried that how many smaller firms will be able to raise wages in fiscal 2025 and the differential between firms that can raise wages and firms that cannot raise wages will become clearer, although the overall wages on a macro-basis are likely to rise a certain degree,” Kameda said.

As it did last year, the BOJ will try to form a view of the likely extent of fiscal 2025 wage increases before results from the authoritative survey by trade union confederation Rengo are released next March, he said.