MNI INTERVIEW: BOJ Jan Hike Most Likely, But Yen Crucial
MNI (TOKYO) - A weaker yen below JPY155 and toward JPY160 against the greenback could induce the Bank of Japan board to increase the policy rate at the Dec 18-19 meeting, a former BOJ chief economist has told MNI, noting a January hike would be the more likely scenario otherwise should the economy and prices move as expected.
“The rate hike timing depends on the evolving dollar/yen rate,” said Kazuo Momma, now executive economist at Mizuho Research and Technologies. “If the yen weakens further, it will cause a political call for BOJ action, making it easy for the Bank to raise the rate.”
“The only condition that the government tolerates the BOJ to raise the rate is a weaker yen,” Momma said, pointing to July’s hike as the yen depreciated to JPY161. (See MNI BOJ WATCH: Ueda Keeps Rate Hike Options Open)
“There was a clear message to raise the rate from the political side.”
If the yen falls below JPY155 and moves toward JPY160, the government will focus on forex intervention, while the public’s dissatisfaction with high prices will grow, a weak point for the government, he argued.
HIKE PACE
The BOJ is expected to raise the policy rate every six months – in January, July and then again in January 2026 – to reach the 1% lower end of the estimated neutral interest rate by the end of fiscal 2025, Momma argued, noting this was one possibility among many amid high uncertainty.
The Bank should switch its focus from upside inflation risk to concern that prices could fall, he added. High wages have increased services prices, but they lack enough strength to achieve the BOJ’s 2% price target in a sustainable and stable manner, he warned.
“If the inflation rate moves in a range of 1% to 2%, there is no reason that the BOJ will raise the rate above 1%,” he continued.
However, fiscal policy that boosts demand and adds upward pressure on wages amid the labour shortage will inflate services prices and could change the Bank’s view, he added. “If that happens, the inflation rate will stay above levels that I predict and the BOJ will need to raise the rate to 2% rapidly,” he warned.
While the GDP deflator has risen and held positive, indicating a change to the zero-inflation norm, it is not perfectly consistent with 2% inflation, he added.
DOMESTIC FACTORS
Uncertainties over the U.S. economy and financial markets at present will not be enough to halt a rate hike, Momma continued.
“Domestic factors, in addition to the forex rate and the U.S. economy, play a big role in deciding rate hikes,” he explained, noting the government is focused on private consumption, which needs to be strong for the BOJ to raise the policy rate.
“The government aims to get rid of years of deflation,” Momma said, adding this would require a full economic recovery, including firm real wages and private consumption, not just price rises.
The government will compile a supplementary budget this fiscal year and next fiscal year to increase public approval ahead of 2025’s upper house election, he added.
President-elect Donald Trump's plan for higher tariffs in 2025 could also impact the global economy, he said, noting Chinese retaliation may lead to a trade war. “Predicting market moves is very difficult,” Momma said.