TOKYO: The Bank of Japan (BoJ) will continue to raise its benchmark interest rate to ensure that the price trend doesn’t exceed 2%, board member Kazuyuki Masu says, in comments that support widespread expectations that the bank will raise borrowing costs next week.
“BoJ will continue to raise the policy interest rate” given a prevailing price trend very close to 2% and financial conditions that remain accommodative, Masu said yesterday in a speech to business leaders in Fukui, in western Japan.
“What is most vital from now on is to ensure that the underlying inflation rate does not significantly exceed 2%.”
Masu’s remarks indicate that the BoJ won’t be finished with tightening its settings even as the policy rate is set to enter the lower range of the estimated neutral level for the first time in the current hiking cycle.
“To complete the normalisation of monetary policy in Japan, I am convinced that BoJ needs to raise the policy interest rate further,” Masu said.
“So that it falls solidly within the estimated range of the neutral interest rate, thereby ensuring the flexibility needed to swiftly adjust the policy rate in either direction, depending on economic conditions.”
The BoJ is leaning toward raising its benchmark interest rate by a quarter point to 1.25% next week, people familiar said earlier this month.
The central bank has estimated that a neutral rate is somewhere between 1.1% and 2.5%.
Masu noted that rising prices for fuel and chemicals stemming from the war in Iran have pushed up prices across a broader spectrum of goods. The rise in shipping fees for imported raw materials and higher costs for imported fertilisers are factors that are contributing to food price increases, for example, he said.
“There are concerns that the price hikes in these goods may not be temporary shocks but rather represent more enduring trends that risk pushing up overall prices.”
Data released this week supported the case for BoJ rate hikes, with gross domestic product in the second quarter revised higher to 1.4% from the previous quarter on an annualised basis, and wages in July rising at the fastest clip in almost 30 years. Economists see a key inflation gauge to rise toward 3% this year.
“If inflation accelerates here, there is a risk that BoJ might inevitably need to implement a rapid policy interest rate hike,” Masu said.
Swap contracts show a roughly 97% probability that the BoJ will raise borrowing costs from 1% at the end of a two-day meeting on Sept 18.
US Treasury Scott Bessent has played a major role in spurring that speculation by repeatedly indicating that the BoJ needs to hike.
Masu helped buoy market expectations ahead of the June rate hike by suggesting the need for action. — Bloomberg
