By Leika Kihara
TOKYO, Dec 23 (Reuters) – The Bank of Japan chief’s vague commentary on the timing of the next interest rate hike last week riled up the yen bears once again, but hidden in his caution were firm clues the bank could pull the trigger sooner than currency markets think.
The BOJ lifted rates to their highest in 30 years on Friday and Governor Kazuo Ueda in his post-meeting press conference left no doubt there were more hikes to come.
While that pushed bond yields to multi-decade highs, the yen’s fortunes were dictated by what the perceived dithering on monetary policy would mean for the U.S. yield advantage over Japan, which is shrinking too slowly for some investors.
However, analysts and sources familiar with the central bank’s thinking say the BOJ’s ambiguous communication is likely aimed at leaving flexibility on the exact rate-hike timing and belies the BOJ’s resolve to keep pushing up borrowing costs.
“The BOJ probably wants to resume rate hikes at a pace of about once every six months,” said former central bank board member Makoto Sakurai, who projects three more hikes to 1.5% including one around June or July next year.
“Recent surveys suggest inflation has become embedded in Japan’s economy. The BOJ could raise rates earlier than expected if inflation accelerates,” said Sakurai, who retains close contact with incumbent policymakers.
Markets currently expect the next hike to come in the second half of next year, but others have more hawkish expectations.
There is a slim chance the BOJ could hike rates again as soon as April, some of the sources say, though adding the timing is highly dependent on upcoming data. Analysts at JP Morgan also expect the first rate hike to come in April, followed by another in October next year.
PLENTY OF HAWKISH CLUES
The yen lost 1.4% to the dollar after Friday’s meeting. The declines prompted the sternest warning yet from Japan’s finance minister on Tuesday that Tokyo was ready to intervene in the market to arrest the currency’s slide.
For markets, Ueda’s comments on Friday left them guessing how far the BOJ’s policy rate could be from levels deemed neutral to the economy, which it currently estimates as in a wide range of 1.0% to 2.5%.
But while he refrained from narrowing the estimated neutral rate range, Ueda said there was “some more distance” before the BOJ’s policy rate approached the bottom of the range in a sign further rate hikes were on the table.
There were other hawkish clues.
For one, the BOJ revised up its view on overseas growth and said concerns over the hit from U.S. tariffs receded, declaring an end to a period when tariff risks dominated the policy debate and forced it to pause its rate-hike cycle.
The central bank maintained a pledge to continue raising rates and projected firms to keep rising pay next year, underscoring its growing conviction that Japan was on course to durably hit its 2% inflation target.
Ueda also said Japan’s real interest rates remained “very low” with no sign past rate hikes led to a strong tightening in financial conditions, highlighting the economy’s resilience to the impact of higher borrowing costs.
YEN REMAINS KEY
As with past policy shifts, a weak yen will likely factor heavily in the BOJ’s decision on how soon to hike rates.
The BOJ’s exit last year from massive stimulus and a series of subsequent rate hikes coincided with yen falls that triggered warnings from the government worried about the hit to households from rising living costs.
In a sign of the BOJ’s alarm over the currency, Ueda said some board members told Friday’s meeting that recent yen falls were pushing up prices via higher import costs and could affect underlying inflation.
It is rare for the governor to reveal details of a policy meeting’s deliberations before the minutes are disclosed.
“If yen falls heighten inflationary pressure, that will be a factor justifying rate hikes,” said one of the sources, a view echoed by two other sources.
Former BOJ executive Akira Otani, who is currently managing director at Goldman Sachs Japan, expects another rate increase in July, but adds that yen moves could sway the timing.
“Judging from the BOJ’s concern over upside price risks on display at the news briefing, the next rate hike could be pushed forward if yen declines proceed,” he said.
Highlighting the board’s growing awareness of mounting inflationary pressure, two board members dissented to the BOJ’s price forecasts on the view underlying inflation has already hit 2%, or likely to meet the level sooner than expected.
Aside from the weak yen, an intensifying labour shortage is likely to push up labour costs. The government’s big spending package could add to inflationary pressure by stimulating demand, analysts say.
Early signs on how the BOJ views such inflationary pressures will come at its next policy meeting on January 22-23, when the board produces fresh quarterly growth and price forecasts.
While an upgrade to the board’s price projections would firm the case for more hikes, it would also cast doubt on the BOJ’s view it was not behind the curve in addressing the risk of too-high inflation, some analysts say.
“When real interest rates are deeply negative, it’s hard to expect the yen’s downtrend to change despite verbal warnings from the government,” Naoya Hasegawa, chief bond strategist at Okasan Securities.
“Markets are losing sight of where the terminal rate could be on heightening concern the BOJ is being behind the curve.”
(Reporting by Leika Kihara; Editing by Sam Holmes)
