Bank of Japan Board Members Advocate for Early Rate Hike

According to minutes released on Monday, at least two of the Bank of Japan’s (BOJ) nine board members called for an early interest rate increase during a June policy meeting. This underscores the central bank’s hawkish tilt, suggesting further rate hikes could be on the horizon.

Impact of Yen Depreciation:

The minutes showed that “Members agreed that the yen’s recent falls were among factors that push up inflation and must warrant close attention in guiding monetary policy.” The discussions highlighted the significance of yen movements and inflation concerns in the BOJ’s decision-making process. This led to the central bank’s decision in July to raise interest rates to levels not seen in 15 years.

On Monday, the Japanese currency sharply reversed course, reaching a seven-month high, buoyed by weak U.S. labor data, which has fueled recession worries. Market participants are now focusing on BOJ Deputy Governor Shinichi Uchida’s speech on Wednesday for clues on the pace of future rate hikes.

Economic Implications and Future Rate Hikes:

“Given how latest yen rises are reducing the risk of an inflation overshoot, we expect the BOJ to hike rates at a cycle of once every six months,” said Yoshimasa Maruyama, chief market economist at SMBC Nikko Securities.

Despite keeping rates steady in June, some BOJ board members expressed concerns about rising import costs from a weak yen, hurting consumer sentiment, and increasing the risk of an inflation overshoot.

Diverging Views Among Board Members:

One member suggested that the BOJ should consider “adjusting the degree of monetary easing” to mitigate future inflation risks as firms increasingly pass on costs to consumers. Another member emphasized the need to closely monitor relevant data before the July meeting, advocating for a timely rate hike if necessary.

The yen, which hovered around 157 to the dollar during the June meeting, hit a 38-year low below 161 in July, likely influencing the BOJ’s decision to raise short-term rates to 0.25% from 0-0.1% at the July 30-31 meeting. The Japanese currency stood at 145.15 on Monday.

Bank of Japan Stance and Economic Outlook:

Following the July rate hike, BOJ Governor Kazuo Ueda did not rule out another increase this year, emphasizing the bank’s readiness to continue hiking borrowing costs to levels considered neutral for the economy, estimated by analysts to be between 1% and 1.5%. The outlook for private consumption remains critical to the timing of the next rate hike, as rising living costs affect household sentiment.

According to a Reuters poll, Japan’s second-quarter gross domestic product (GDP) data, set to be released on August 15, is expected to show a rebound in consumption after four quarters of decline. This data will be crucial for assessing the potential impact of wage increases on boosting consumption.