BOJ debates possible rate hike messages as inflation rises

Bank of Japan policymakers are debating how quickly they can telegraph a possible rate hike that could come before inflation hits the bank’s target of 2%, the source said. While an actual rate hike is unlikely to be imminent and the BOJ is expected to remain super-perfect until at least the end of the year, financial markets may underestimate their willingness to phase out their once-radical stimulus program.

In particular, the Bank of Japan’s prudent commitment to keep monetary policy accommodative only applies if it continues to supply cash to the market, rather than keeping interest rates at their current low levels. “The BOJ has never promised to keep rates at the same level until inflation exceeds 2%,” said a source familiar with the BOJ’s views. Two other sources also support this. “In theory, this means that inflation could raise interest rates before they continue to beat their targets.”

After nine years of aggressive monetary easing, the Bank of Japan appears to have finally got what it wants. Inflation is slowly moving towards its elusive target and is already changing public opinion about perpetuating deflation. With growth driven by higher commodity prices rather than expected domestic demand recovery, the BoJ’s short-term priority is to avoid temporary inflation by encouraging market speculation about early tightening.

Many BOJ officials do not expect conditions to justify a rate hike this year, given the uncertainty over whether consumption will strengthen enough to allow businesses to continue raising prices. This could mean that the actual rate increase could only happen in 2023 and under the new governor, who will replace incumbent Haruhiko Kuroda whose term ends in April next year.

However, the Fed’s plans for stable rate hikes, a weaker yen and growing public dissatisfaction with rising cost of living could allow the Bank of Japan to act more daringly, brainstorming future exit plans, sources say. Another source said, “For the first time in a long time, there are downside risks as well as upside risks in the price outlook.”

A third source said, “The Bank of Japan should pay close attention to what other central banks are doing.” The central bank’s nine-member board is split between those who see room for stimulus and those who are wary of taking action that could be interpreted as austerity measures.