TOKYO: The Bank of Japan is set to raise interest rates on Friday to a three-decade high and signal its readiness for further hikes beyond next year, underscoring its conviction that sustained wage gains will keep inflation around its 2% target.
While a hike still keeps its policy rate low by global standards, it would be another landmark step in Governor Kazuo Ueda's efforts to normalise monetary policy in a country long accustomed to unconventional easing and near-zero rates.
The BOJ is widely expected to raise short-term interest rates to 0.75% from 0.5% at a two-day meeting concluding on Friday, which would mark the first increase since January.
It would also take rates to levels unseen since 1995, when Japan was reeling from the burst of an asset-inflated bubble that drew the BOJ into a prolonged battle with deflation.
Markets are focusing on Ueda's post-meeting news briefing for clues on the pace and extent of future rate rises, which may have global market repercussions by altering the yen's status as a cheap source of funding for investors worldwide.
"We think Ueda will dial up confidence that inflation is on track to anchor around 2%, real rates will remain very low and financial conditions accommodative even after the hike, implying some further normalisation likely required over time," analysts at Evercore ISI wrote in a research note.
"We expect the message will be consistent with the next hike penciled in for July-September conditional on recovery from the soft patch," they said.
A Reuters poll showed 90% of economists expect the BOJ to hike rates to 0.75% in December and slightly over two-thirds see rates reaching at least 1.0% by September next year.
The BOJ's decision comes a day after the European Central Bank kept policy steady and signaled an end to its rate-cut cycle.
The BOJ's much-anticipated hike to 0.75% would also bring rates closer to levels deemed neutral to the economy, which the BOJ estimates as in a range of 1% to 2.5%, and complicate the bank's decision on how far to push up borrowing costs.
Sources have told Reuters the BOJ will not publish on Friday updated findings of its neutral rate estimate, or use it as a key communication tool.
Instead, Ueda is likely to stress the bank's readiness to keep raising rates, but remain non-committal on how fast and how much it would do so, they said.
The BOJ ended a decade-long, massive stimulus last year and raised rates twice including to 0.5% from 0.25% in January on the view Japan was on the cusp of durably achieving its 2% inflation target.
Recent central bank surveys showed business confidence hitting a four-year high and many firms on course to continue offering bumper pay next year, a sign the economy was weathering the hit from higher U.S. tariffs for now.
With stubbornly high food costs keeping inflation above target for nearly four years, a growing number of BOJ board members have signaled their readiness to vote for a rate hike to avoid being late in addressing the risk of too-high inflation.
Data released on Friday showed core consumer inflation hit 3.0% in November, steady from the previous month and well exceeding the BOJ's target.
Recent yen declines, which push up import costs and broader inflation, also helped the BOJ convince dovish premier Sanae Takaichi's administration of the need for another rate increase.
Toshihiro Nagahama, a government panel member seen as among reflationist aides of Takaichi, said the administration may have nodded to another rate hike on concern a weak yen could diminish the positive effects of its stimulus package.
"I personally feel that exchange rates have a huge impact on BOJ policy decisions," he told a seminar on Wednesday. - Reuters
