Bank of Japan drops fresh hints of near-term rate hike as yen slides

[TOKYO]The Bank of Japan (BOJ) will discuss at upcoming policy meetings the feasibility and timing of a rate hike with a focus on next year’s wage-growth impulse, governor Kazuo Ueda said, signalling the chance of a near-term rise in still-low borrowing costs.

The remarks, which came after data showed core consumer inflation stayed above the BOJ’s 2 per cent target in October, keep alive the possibility of a rate hike as soon as its next policy meeting on Dec 18 and 19.

Speaking in parliament on Friday (Nov 21), Ueda also said the BOJ must be mindful that the weak yen could affect underlying inflation, a key gauge it looks at in deciding how soon to raise rates, by pushing up import costs and broader prices.

“Compared with the past, the impact of currency moves on inflation may have become bigger because companies have become more active in raising prices and wages,” Ueda said.

“We must be mindful that price rises, through such channels, could affect inflation expectations and underlying inflation,” he said, adding the BOJ will be vigilant of such currency-linked effects on domestic prices.

The comments came as the yen’s slide to a 10-month low against the US dollar raises pressure on Japanese policymakers to combat further declines in the currency that would inflate households’ cost of living.

Yen moves have historically been key triggers of BOJ policy changes, including last year, when the central bank raised interest rates in July amid political calls for steps to combat the currency’s sharp declines.

Many market players expect the BOJ to raise rates either next month or at a subsequent meeting in January.

Last year, the BOJ exited a decade-long, massive stimulus programme. It raised rates twice since then, including in January this year. It has kept its policy rate steady at 0.5 per cent since then, even as consumer inflation has remained above its 2 per cent target for over three years.

Ueda said that the BOJ decided to keep rates steady last month to take “a bit more time” to scrutinise signs on whether firms will keep raising pay in next year’s wage talks with unions.

The central bank was still collecting relevant information, including from its branches nationwide, Ueda said.

“The BOJ will discuss the feasibility and timing of an interest rate hike at upcoming meetings, looking closely at various data and information.”

Ueda reiterated there was no change to the BOJ’s stance of continuing to hike rates if the economy moves in line with its forecasts, adding that he expects underlying inflation to reach 2 per cent from the latter half of fiscal 2026 through fiscal 2027. REUTERS