MNI INTERVIEW: BOJ To Set Rate At 0.75% In Q3 - Kameda
MNI (TOKYO) - The Bank of Japan will likely raise the policy rate to 0.75% in Q3 after increasing it 25 basis points to 0.50% this week, a former BOJ chief economist told MNI.
“The BOJ will likely raise the rate this week as it hasn’t sent a message denying [it],” said Seisaku Kameda, executive economist at insurance firm Sompo Institute Plus. (See MNI BOJ WATCH: Board To Discuss Hike, Shift Outlook)
The Bank is expected to raise the policy rate to 0.75% in the third quarter after examining the impact of the higher policy rate on economic activity and corporate wage momentum, particularly if annual spring negotiations are positive, Kameda said. Markets have priced in a 0.72% policy rate by December.
A 0.75% policy rate will track closely to the Bank’s neutral interest rate, making it difficult for the BOJ to state clearly that the real interest rate is too low, he added.
Kameda, who left the BOJ in 2022, noted the Bank had not received any significant data since the Dec 18-19 board meeting, although it can confirm wage-hike momentum. “I expected the reports from the branch managers’ meeting would have been favourable for the BOJ,” he said, pointing to data showing solid wage hikes before the meeting.
The BOJ could have hiked in December based on available data, but saw no cost to hold, he added. Kameda told MNI in October a December hike would hinge on the outlook for the U.S. economy. (See MNI INTERVIEW: BOJ Dec Rate Hike Hinges On US Outlook - Kameda)
RISKS AHEAD
Yen weakness against the dollar will also continue as narrowing between the Japanese and U.S. interest rates will remain slow, driven by the BOJ’s gradual rate hikes and the Federal Reserve's reluctance to increase.
The risks to the global economy, financial markets, and the potential for a stronger yen, which would dampen Japanese exports and corporate profits, remain key concerns for the Bank, he said. “Bank officials are also worried about the risk that major manufacturers, which are a driving force of wage hikes, will not raise wages as much as they initially planned,” Kameda added, noting the risk was small.
Services prices, excluding dinning and accommodation, have not risen in line with the Bank's expectations, and have failed to show signs of strengthening momentum, he warned. Bank officials will watch whether they increase in or after April when firms revise their retail prices to gauge the economy's ability to achieve the 2% price target sustainably, he added, noting weak services had made it difficult for the Bank to identify both first- and second-order inflationary forces.
Goods prices have likely peaked and stayed at high levels as firms that have not transferred elevated costs raise their prices, he argued. “Although the BOJ expected the cost-push from the rise in import prices to wane,” Kameda continued. The Bank likely sees recent price moves as evidence that Japan’s economy is changing, he said.
The BOJ board will meet over Jan 23-34.