MNI POLICY: BOJ Set For Sept Pause, Rate Hike Path Intact

MNI (TOKYO) - The Bank of Japan's longer-term plan to normalise its monetary policy and raise interest rates remains intact, MNI understands, although policymakers will likely pause to assess the current situation in at least September, despite Governor Kazuo Ueda's recent comments to legislators that further hikes are still in play this year.

Heightened uncertainty over the degree of the U.S. economic slowdown and volatile global financial markets will allow policymakers to take a rate-hike break in September, with BOJ officials investigating how a weaker American economy will weigh on Japanese exporters, particularly if the yen strengthens strongly from here.

Ueda recently told lawmakers that the BOJ will continue to hike rates if inflation and the economy continue in line with expectations, although he noted the Bank will monitor the outlook as markets at home and abroad remain unstable.

However, recent market volatility will not derail the BOJ’s long-term rate hike plan considering real interest rates remain at very low levels and far below the perceived neutral rate.

SEPTEMBER A.HEAD

The BOJ is seen keeping its policy rate unchanged at 0.25% at the Sept 19-20 meeting, with the Board awaiting an update on the growth and inflation outlooks at the October meeting.

Federal Reserve Chairman Jerome Powell said recently the current level of policy rate gave the FOMC “ample room to respond to any risks,” including that of further unwelcome labour market weakening. If Japanese exports to the U.S. as a main engine for a sustainable economic recovery and the wage-price virtuous cycle lose momentum, it will give the BOJ respite from its policy normalisation. (See MNI INTERVIEW: US Export Demand Key For BOJ Tightening- Sekine)

Officials are still focused on incoming wage data to confirm the view that wage hikes are starting to broaden across the economy to smaller-sized companies, although there is some concern that the recent rate hikes will weigh on both company and household spending. July real wages data is due on Sep 5.