BOJ lays groundwork for December hike, route beyond 1.5% hazy
The Bank of Japan has strengthened hints that borrowing costs could climb from 1.25% to 1.5% in December, citing headway toward its 2% price target. How far tightening goes afterward remains clouded by doubts over Japan's neutral rate.
Governor Kazuo Ueda explained that the central bank chose to leave rates unchanged at its most recent meeting so officials could study economic and price trends a bit longer. He added that the board would focus closely on the danger of inflation running hotter than expected when it convenes again, a comment that has reinforced bets on action in December.
Japan’s output grew at an annualised pace of 1.4% in the second quarter, and core consumer prices climbed 2.1% in September, surpassing the BOJ’s goal. Within its newest quarterly projections, the bank nudged its fiscal 2027 core inflation estimate up to 2.6% from a prior 2.4%, and raised its “core-core” gauge, which strips out fresh food and energy, to 2.7% from 2.6%.
Nobuyasu Atago, a former BOJ insider who now serves as chief economist at Rakuten Securities’ economic research arm, argued that a December increase appears all but certain, though the more pressing question is whether tightening carries into next year toward 1.75%, a rate some regard as roughly neutral.
Internal BOJ estimates place the nominal neutral rate somewhere in a wide band of 1.1% to 2.5%, complicating the calculus for policymakers. Views on the board diverge sharply: hawks Naoki Tamura and Hajime Takata have pressed for quicker increases, with Takata having unsuccessfully pushed for a jump to 1.5% at the last gathering, while Junko Koeda and the pair of board members named by Prime Minister Sanae Takaichi lean toward a slower approach. Mari Iwashita, a strategist at Nomura Securities, suggested the central bank probably still sees current rates sitting below neutral territory, which could pave the way for a move to 1.75% around March, followed by a pause to gauge how earlier hikes are working through the economy.
Ueda has conceded that credit conditions have tightened for smaller firms but insists broader financial conditions remain supportive.
Any increase by the BOJ would shrink the interest-rate differential between Japan and other major economies, a dynamic that typically bolsters the yen versus the dollar and other currencies. Higher domestic borrowing costs would also likely shape capital flows into Japanese government bonds and affect yen-funded carry trades worldwide.
Sources: Investing.com (economy); Economic Times Markets; investingLive