MNI POLICY: BOJ’s Political Concerns Slowing Hikes

The potential political reaction to rate hikes is making senior Bank of Japan officials tend towards normalising policy more slowly, despite data showing it is moving towards achieving its inflation target, MNI understands.

The Bank’s concerns over politics, and also over how markets might react to higher rates, means that an increase to the 0.25% policy rate at the Dec 18-19 meeting will be unlikely unless the yen weakens to JPY160 against the dollar.

A weaker yen, now trading around JPY151, would provide political cover for higher rates, officials consider.

Rising political concerns are also complicating communications for the Bank, which must clarify the policy reaction function and explain its policy moves in terms of economic data.

CONTRADICTIONS

While Governor Kazuo Ueda has said the Bank will hike should economic activity and prices track the BOJ’s forecasts, his message seems to contradict the most recent board decisions, which were in favour of holding rates despite his conditions being largely met. 

After its Oct 30-31 meeting, the Board justified its decision not to hike by pointing to concerns over global uncertainty and underlying inflation. Underlying inflation is moving at around 1.5%, while trimmed mean rose 1.7% y/y in October. (See MNI BOJ WATCH: Ueda Opens Door To Dec Hike, Eyes U.S., Mkts)

While Bank officials are not presently overly concerned about the cost of delaying normalisation, the BOJ will not be able to delay rate hikes further should underlying inflation reach 2% or the chances of this occurring increase.

The Bank needs slow, cautious hikes that it can monitor closely, due to the difficulty it has in estimating the neutral rate. But this strategy also greatly increases the risk of falling behind the curve.