Bank of Japan Discusses Interest Rate Hikes

By Leika Kihara

TOKYO (Reuters) – Bank of Japan policymakers discussed the need for caution over near-term interest rate hikes, expressing concerns about unstable financial markets and the U.S. economic outlook, according to a summary of their September meeting.

Even a proponent of future rate increases called for patience, highlighting a dovish shift in the nine-member board that reduces the likelihood of a hike in October.

“I remain convinced that if it’s confirmed that there will be no major downward revision to our outlook, it’s desirable to raise rates without taking too much time,” one member stated during the September meeting.

“But rate hikes should not be an end in itself,” the member added, urging for the need to wait for the “appropriate” timing for increasing borrowing costs.

Given economic and market uncertainties, BOJ policymakers agreed that raising rates now could imply a shift to a full-fledged monetary tightening cycle, with one member warning:

“Overseas economic uncertainties have heightened. We should scrutinize overseas and market developments closely for the time being,” noting that rate hikes could wait until those uncertainties decrease.

During the September meeting, the BOJ maintained short-term rates at 0.25%. The governor indicated the bank could take time to assess global economic fallout, signaling no rush to increase borrowing costs further.

The BOJ is scheduled for a rate review on October 30-31, when it will release new quarterly growth and price forecasts crucial for the bank’s long-term policy path.

“In conducting monetary policy, it’s necessary to give due consideration to downside risks to Japan’s economy and monitor data carefully,” another opinion expressed, indicating a shift away from inflation concerns to supporting a fragile recovery.

The BOJ concluded negative rates in March and raised short-term borrowing costs to 0.25% in July, believing Japan is progressing towards achieving its 2% inflation target.

The rate hike in July, along with Governor Kazuo Ueda’s hawkish comments and weak U.S. labor market data, triggered a spike in the yen and a stock market downturn in early August. Since then, BOJ officials have emphasized the need to consider economic fallout from market volatility.

The September 19-20 policy meeting followed the U.S. Federal Reserve’s decision to significantly reduce borrowing costs. The departure of Prime Minister Fumio Kishida, who appointed Ueda and supported the BOJ’s policy normalization, adds to uncertainties regarding the central bank’s potential interest rate increases to neutral levels, estimated by one board member to be at least 1%.

At the September meeting, concerns were raised about the yen’s sharp reversal from previous weaknesses, which could affect exports and discourage manufacturers from increasing wages.

“Uncertainties have heightened about the U.S. economy and the pace of rate cuts by the Fed. Attention needs to be paid to the possibility that these factors will negatively impact the yen’s exchange rates and corporate profits in Japan,” another opinion noted.

“As for the next rate hike, I’m focusing on developments in consumer inflation, the momentum towards next year’s wage talks, and U.S. economic developments,” a separate member concluded.