Bank of Japan hints at near-term rate hike, pushing yields higher

BANK of Japan (BOJ) governor Kazuo Ueda said inflation would likely accelerate from “summer towards autumn” as bumper pay hikes push up prices, the Asahi newspaper reported, his strongest hint yet that another interest rate hike was possible in coming months.

Ueda also said the central bank could “respond with monetary policy” if currency moves significantly affect inflation and wages, according to the interview that ran on Friday (Apr 5), suggesting sharp yen falls could affect the timing of the next rate hike.

“We ended our massive stimulus programme because we saw prospects for trend inflation to approach 2 per cent come into sight. If we become more confident about such prospects, that will be one reason to move interest rates,” Ueda was quoted as saying.

“Sustainable and stable achievement of our 2 per cent inflation target is coming into sight. The possibility of achievement is expected to increasingly heighten,” he said, according to Asahi’s interview that was conducted on Wednesday.

In a rare mention of an explicit timing, Ueda also expects inflation to pick up “from summer towards autumn” as wage increases begin to give households purchasing power.

The hawkish remarks pushed up Japan’s two-year government bond yield, which is highly sensitive to BOJ policy, to 0.21 per cent, to its highest level in 13 years on Friday.

The comments highlight the BOJ’s conviction that rising wages and inflation will help make the case for hiking short-term rates from the current zero to 0.1 per cent level as soon as July.

“As priced in by markets, another rate hike by around autumn is becoming a realistic scenario,” said Naoya Hasegawa, chief bond strategist at Okasan Securities.

“An additional rate hike in October to December is now on the cards. But given how Ueda mentioned prospects for achieving 2 per cent inflation will ‘increasingly heighten’, there might be a chance of a hike in July to September,” analysts at SMBC Nikko Securities wrote in a research note.

When asked whether the BOJ could raise interest rates this year, Ueda said it was “dependent on data” and how much progress Japan makes towards sustainably achieving the bank’s 2 per cent inflation target, according to Asahi.

The BOJ releases fresh quarterly growth and inflation forecasts at its next meeting in Apr 25 to 26. Its board also holds rate-setting meetings in June, July, October and December.

Yen complicates rates

The BOJ ended eight years of negative interest rates and other remnants of its unorthodox policy last month, making a historic shift away from its focus on reflating growth with decades of massive monetary stimulus.

A Reuters poll taken shortly after the March move showed more than half of economists expecting another rate hike this year, with October to December the most popular bet on the timing.

Data since then has been mixed with consumption and output showing weaknesses, but the wage outlook continuing to improve.

Japanese firms agreed to raise wages 5.24 per cent this year, the highest increase in 33 years, according to a survey by labour umbrella Rengo released on Thursday.

The BOJ said in a report released this week that wage hikes were broadening to smaller firms in regional Japan, prodding firms to pass on labour costs through price hikes.

However, the weak yen complicates the BOJ’s policy path.

While declining to comment specifically on the yen’s recent declines, Ueda signalled in the interview that such moves could serve as a reason to raise interest rates if they push up inflation via higher import costs.

“If exchange-rate developments appear to have an impact on Japan’s wage-inflation cycle in a way that is hard to dismiss, that would be a reason to respond with monetary policy,” Ueda was quoted as saying by Asahi.

The yen has been on a downtrend despite the BOJ’s exit from ultra-loose policy, as traders interpreted its dovish language as signalling that the next rate hike will be some time away.

Japanese authorities have signalled intervening in the market to prop up the yen after the currency hit a 34-year low of 151.975 to the US dollar last week.

“With the dollar rising above 151 yen, the BOJ may have seen the need to move in lockstep with the government in sending a message” warning against excessive yen declines, said Yasunari Ueno, chief market economist at Mizuho Securities.

A weak yen has become a source of headache for Japanese policymakers as it inflates the cost of importing raw material and fuel, thereby hurting households and retailers. REUTERS