MNI INTERVIEW: September Likeliest For Next BOJ Hike - Momma

The Bank of Japan is most likely to wait before its next rate hike until at least September's meeting, which will take place after July wages data are released on Sept 5, though there is a small chance of an earlier move, the BOJ’s former executive director and chief economist Kazuo Momma told MNI.

“The BOJ could raise its policy interest rate to 0.25% in July if government wage data for May or the outcome of the BOJ branch managers’ meeting is very strong, but it is unlikely,” said Momma, now executive economist at Mizuho Research and Technologies, adding that the central bank was more likely to wait.

Momma’s baseline scenario is for rates to rise to 0.50% or 0.75% during the fiscal year ending on March 31, 2025, though there is a possibility of a hike to 2% or higher if upside risks to prices materialise in fiscal 2025.

So far the pass-through from strong wages to prices has yet to be sufficiently confirmed, and price data and private consumption are weak, making it difficult for the BOJ to raise the policy rate at the July 30-31 meeting, he said.

“Wage data from May through July are key, with May wage data (due out on Monday) particularly important.”

Private consumption fell 0.7% q/q in the first quarter, its fourth straight quarterly drop. June’s Tankan survey also revealed this consumption weakness, and while non-manufacturers are considering raising retail prices they worry about its effect on demand, Momma said, though he added that consumption is expected to rise in the second quarter, with GDP data for the period released on Aug 15.

REDUCTIONS TO BOND PURCHASES

The Bank is also due to provide details of planned reductions in its purchases of Japanese government bonds, and Momma said in an interview that it is likely to first reduce its monthly buys to about JPY5 trillion, before later reducing them to JPY4 trillion and then JPY3 trillion. (See MNI POLICY: BOJ Bond-Buy Reduction Scale Due Post-Consultations)

While the BOJ is concerned that fewer purchases could prompt an unwelcome rise in long-term rates, the former chief economist said investors already seem to have factored in the reduction and that the long end of the curve will be more affected by the same wage and price dynamics, which, if they accelerate, could lead to the BOJ to hike more than expected to 2%.

The BOJ is likely to reduce its bond holdings, which totalled about JPY588 trillion as of June 30, by about 10% over one to two years, Momma said.

“If the period [of this reduction] is the one-and-a-half years until the end of 2025, that means they would have reduced JGB buying by JPY50 to JPY60 trillion during the period. If the BOJ halves the scale of JGB buying from about JPY6 trillion per month to JPY3 trillion, the scale of bond buying would fall by JPY54 trillion over 18 months,” Momma explained.