BANK of Japan (BOJ) deputy governor Shinichi Uchida signalled that the benchmark interest rate remains on a gradual upward path, in remarks that may quell speculation of an early move.
“The Bank will accordingly continue to raise the policy interest rate and adjust the degree of monetary accommodation” if the economic outlook is realised, Uchida said on Wednesday (Mar 5) in a speech to business leaders in Shizuoka, central Japan. “In this regard, the key point of the outlook is that the bank expects the 2 per cent price stability target to be achieved.”
Uchida said officials will have to monitor the economy’s reaction to every rate hike – after three increases in the last 12 months – as it’s hard to gauge exactly where the neutral rate that’s neither restrictive nor stimulative resides. That comment suggests it’s unlikely the bank would raise rates at back-to-back meetings, including in March after it hiked in January. He indicated that the benchmark rate could rise to at least 1 per cent by the end of fiscal 2026 by citing a range of estimates.
Uchida’s remarks come as BOJ watchers are looking for any hints that the next upward move could come earlier than the consensus view that projects the move will come in the summer. Recent economic data, persistent yen weakness and growing attention to surging food prices have prompted some economists to cite the risk of an early move.
While Uchida reiterated the BOJ’s stance to keep raising borrowing costs, he offered little indication that the bank is leaning towards an early move after the hike to 0.5 per cent in January.
Uchida used a chart as a reference to show market expectations for the BOJ’s policy rate, illustrating that the outlook is slightly above 1 per cent in two years. When the bank achieves its price target sometime between the second half of fiscal 2025 and fiscal 2026, the policy rate will be approaching a neutral rate at that time, he said.
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“Healthy functioning of the financial markets will require market participants to accurately understand the bank’s policy reaction function,” Uchida said. “I thus think that the bank communicating only ‘the’ answer of the future policy interest rate” might jeopardise the market’s valuable information creation function.
Uchida spoke against the backdrop of deepening concerns over global protectionism. The US slapped new tariffs of 25 per cent on most Canadian and Mexican imports and doubled an existing charge on China to 20 per cent earlier this week, marking one of the largest increases in US tariffs since the 1930s.
US President Donald Trump’s moves triggered reciprocal moves that plunged the world economy into a deepening trade war.
“Uncertainties regarding the global economy remain high, and due attention continues to be warranted,” Uchida said.
With Japan’s recent data suggesting the economy and inflation are moving in line with the BOJ’s expectations, investors have ramped up bets for the pace of a rate hike to be faster and to hit a higher level than previously expected. As at Tuesday, traders saw about 48 per cent of chance for the next hike taking place by June, jumping from around 18 per cent soon after the latest policy meeting in January.
With Uchida considered the most important architect of monetary policy working closely with Governor Kazuo Ueda, BOJ watchers put particular weight on his comments. Speaking in February last year, Uchida clearly telegraphed the manner in which the bank might lower the curtain on its decade-plus monetary easing campaign. The bank did just that one-month later. BLOOMBERG
