MNI POLICY: Ueda's US Concerns To Impede BOJ July Rate Hike

Heightened uncertainty over the U.S. economy will make a Bank of Japan rate hike less likely and fuel Governor Kazuo Ueda’s cautious approach to monetary policy when the board meets July 30-31, MNI understands.

Ueda will prefer to hold the policy interest rate until he receives evidence the U.S. economy will not deteriorate sharply. While the BOJ has not revealed whether Ueda will attend next month’s Jackson Hole economic meeting, the governor joined last year’s session and will likely make an appearance this year to gather insight into the U.S. economy.

Ueda will scrutinise Powell’s U.S. economic outlook, including any downside risks, which he will use to consider carefully whether the BOJ will have a free hand regarding rate hikes. Should the U.S. economy deteriorate sharply, the global and Japanese economies will worsen and Ueda doubts the European and Chinese economies can be relied upon.

A former BOJ economist last week gave a roughly 40% chance of a July rate hike due to favourable trends in the Tankan survey, wages and services prices. (See MNI INTERVIEW: BOJ July Hike Probability 40% - Kameda)

STEADY HAND

BOJ officials also do not see the need to raise the policy interest rate immediately to cope with the upside risks to prices.

However, the BOJ will act should upside risks – or the wage-price spiral – increase on the back of anchored inflation expectations.

But expected inflation has not been anchored at 2% and the BOJ is still focused on achieving its 2% price target in a sustainable and stable manner. Mid- to long-term inflation expectations are rising as bank officials expected in April, but they have not accelerated. Raising the policy interest rate will undermine economic fundamentals and make the price target harder to achieve.

If the BOJ raised the policy rate to 0.25%, it would prompt commercial banks to increase the short-term prime rate, which in turn will raise floating mortgage interest rates, increasing the financial burden on consumers.