BOJ debated need for more rate hikes even after December move, summary shows

[TOKYO] Bank of Japan (BOJ) policymakers debated the need to keep raising interest rates even after a hike in December with one calling for increases every few months, a summary of opinions showed, highlighting their focus on inflationary pressures.

Some board members saw Japan’s still-low interest rates as among factors weakening the yen and adding to price pressures, the summary showed on Monday (Dec 29), suggesting that exchange-rate moves will loom large in their discussions on future rate hikes.

At the Dec 18 to 19 meeting, the BOJ raised its policy rate to a 30-year high of 0.75 from 0.5 per cent, taking another landmark step in ending decades of huge monetary support and near-zero borrowing costs.

The summary showed many board members articulating the need for further increases to the BOJ’s policy rate, which remained significantly negative in inflation-adjusted terms.

“There is still considerable distance to levels deemed neutral,” one opinion showed, adding the BOJ should raise rates “with intervals of a few months in mind for the time being”.

Another opinion said the weak yen and rising long-term interest rates were due in part to the BOJ’s policy rate being too low relative to inflation.

“Raising the policy rate in a timely manner could curb future inflationary pressure and help hold down long-term interest rates,” the second opinion showed.

A third opinion also called for the BOJ to “steadily” raise interest rates to avoid falling behind the curve in addressing the risk of too-high inflation, the summary showed.

Some of the opinions, however, stressed the need to tread carefully with an eye on how the BOJ’s policy moves affect economic, price and financial developments, in deciding future rate hikes.

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“Given the difficulty of identifying the neutral interest rate, the bank should not be aiming for a particular level of the neutral rate, but rather should be flexible in its conduct of monetary policy, since overseas interest rate environments are also expected to change,” one opinion showed.

Government representatives concurred with hike

The summary highlighted the board’s growing confidence that Japan’s economy is likely to weather the hit from higher US tariffs, and allow companies to keep hiking pay next year.

One member projected next year’s wage hikes at big firms to be “at least around the same level as this year”, while another said the government’s big spending package will likely underpin economic growth in the coming one to two years, it showed.

Many opinions also pointed to mounting inflationary pressure with one describing recent price rises as “sticky” and driven by the weak yen and firms’ changing price-setting behaviour.

“If it can be confirmed next spring that wage growth will be at a level in line with the BOJ’s price target for the third straight year, it can be judged that underlying inflation has reached 2 per cent,” one opinion showed.

While consumer inflation has exceeded the BOJ’s 2 per cent target for nearly four years, the central bank has said underlying inflation – or price moves excluding one-off factors – must durably hit its target to justify further rate hikes.

Two government representatives present at the December meeting called for continued policy coordination, but did not push back against a rate hike, the summary showed, a sign the BOJ’s decision had the consent of Prime Minister Sanae Takaichi.

But the representative from the Cabinet Office saw the need for vigilance to future developments in capital expenditure and corporate profits, a sign the government was focusing on how higher borrowing costs could affect corporate activity. REUTERS