Divided Views on Interest Rate Hikes at BOJ Meeting

By Leika Kihara

TOKYO (Reuters) – Bank of Japan (BOJ) policymakers expressed differing opinions on the pace of future interest rate increases, as revealed in the minutes from the July meeting. This divergence highlights ongoing uncertainty regarding when borrowing costs will rise again.

During the July meeting, the BOJ unexpectedly raised short-term interest rates to 0.25% by a vote of 7-2, marking a step towards the end of a decade-long stimulus period.

At least two board members suggested further increases, with one advocating for a “timely and gradual” approach to prevent hasty future hikes. Another emphasized the importance of increasing rates once corporate expenditure, wages, and prices showed significant improvement.

Conversely, several members cautioned against hastiness in phasing out stimulus, stating that the goal of monetary policy normalization should not overshadow other economic considerations. One member stressed that the BOJ must carefully watch various risks and avoid excessive market expectations for rate hikes, especially given inflation has yet to stabilize at the 2% target.

These discussions underscore the challenges faced by BOJ Governor Kazuo Ueda in his commitment to eventually raise rates to a neutral level, one that neither stimulates nor restrains growth. One member noted the difficulty of automatically adjusting rates to a fixed level in light of high uncertainties surrounding Japan’s neutral rate.

Consequently, the BOJ has no option but to pursue a policy of gradually adjusting rates while observing the economy’s responses. Following the July rate hike and Ueda’s assertive remarks, alongside weak U.S. labor data, the yen surged, and the stock market experienced volatility in early August. Since then, BOJ officials have stressed the importance of considering economic impacts from market fluctuations.

After maintaining steady rates in September, Ueda reiterated the bank’s readiness to increase rates if inflation sustainably reaches the 2% target. The governor also indicated that the BOJ would assess the effects of U.S. economic uncertainties on Japan’s fragile recovery, signaling no urgency to further raise rates.

Core consumer inflation was reported at 2.8% in August, remaining above the BOJ’s 2% target for the past 29 months. Meanwhile, Japan’s economy grew at an annualized rate of 2.9% in the second quarter, supported by consistent wage growth driving consumer spending. Although capital expenditure is on the rise, soft demand from China and slowing U.S. growth pose risks to the outlook for Japan’s export-driven economy.