MNI POLICY: BOJ Still On Course For Hikes Despite Volatility

MNI (TOKYO) - The Bank of Japan still sees itself on the road to raising rates to reach its inflation goals, despite remarks by Deputy Governor Shinichi Uchida who said the BOJ will not hike while financial markets are unstable, though further strengthening of the yen could pose a risk to the price outlook, MNI understands.

Bank officials attribute this week’s wild market swings, particularly in Japanese stocks, to thin summer trading volumes and are focused on whether the VIX volatility index falls to a range of 10 to 20 from current levels below 30. This could take time, given sensitivity over U.S. jobs and inflation data ahead of a possible Federal Reserve rate cut in September, and the attention set to be placed on mid-August’s central bank gathering in Jackson Hole.

Still, the BOJ considers that nerves over a possibly deeper U.S. slowdown contributed more to the risk selloff than its own decision to raise its policy rate by 25 basis points last week. The difference in tone between Uchida’s remarks and those by Governor Kazuo Ueda following the meeting were due to the sharp change in financial market conditions rather than to a shift in opinion.

But, while it would take an easing of upside risks to prices to prompt the BOJ to reassess its path, rate hikes could be delayed if the stronger yen dampens inflation and a bigger-than-expected U.S. slowdown impacts global demand.