TOKYO, March 23 (Reuters) – The Bank of Japan is laying the groundwork for tweaks to its policy language in April, keeping alive the chance of a near-term interest rate hike as the weak yen and Middle East conflict pile inflationary pressures on the economy.
While the central bank kept rates steady last week, Governor Kazuo Ueda signalled that the bank was shifting away from a focus on downside risks to the economy that required a slow, cautious approach in pushing up borrowing costs.
For one, Ueda said the board will debate next month tweaking guidance that rate increases would come “in accordance with improvements” in the economy – language seen by some analysts as ruling out the chance of a hike when growth was under pressure.
“Even if the economy comes under downward pressure, if we judge that such downward pressure would be temporary and will not affect underlying inflation, it would be possible for us to raise interest rates,” he said in unusually hawkish remarks that contrast with his typical emphasis on risks to growth.
Any such change would leave scope for the BOJ to hike rates, even if the board cuts its growth forecasts in new quarterly forecasts due at the April 27-28 policy meeting, analysts say.
CHANGING THE STORY ON INFLATION
Another tweak Ueda revealed was a plan to disclose by summer a new indicator on inflation and an updated staff estimate on Japan’s neutral rate of interest, a move he described as part of the BOJ’s efforts to enhance communication.
The new price gauge adds to data the BOJ looks at in determining Japan’s underlying inflation, or price moves driven by domestic demand rather than cost-push factors.
While the central bank already releases estimates of consumer inflation excluding the impact of fresh food and fuel costs, such indices have been swayed by various government steps to cushion the blow to households from rising living costs.
The new indicator will strip away the effect of such government steps that work to push down inflation, including subsidies to slash school tuition fees and gasoline bills.
The gauge is expected to help the BOJ argue that underlying inflation remains on track to stably hit 2%, even if headline inflation briefly slides below the level, analysts say.
“All else equal, such new measures could potentially help the BOJ to navigate through short-term disinflationary measures and justify a faster pace of rate hikes,” said Naomi Fink, chief global strategist at Amova Asset Management.
The BOJ could start releasing the new indicator in April and revise up its price forecasts to account for rising import costs from a weak yen, said Mari Iwashita, executive rates strategist at Nomura Securities.
“The BOJ appears to be doing what it can, including on the communication front, to proceed with policy normalisation. It seems well prepared for the next rate hike,” she said.
MONETARY POLICY AND POLITICS
With the escalation in Middle East tensions jolting markets, however, there is no guarantee the BOJ can convince markets and dovish premier Sanae Takaichi of the need for more rate hikes.
Ueda’s hawkish remarks failed to sustain a rebound in the yen, which fell near the key 160-per-dollar mark on Monday to the disappointment of policymakers fretting of rising import costs from the currency’s weakness.
Japan’s heavy reliance on imports makes its economy vulnerable to surging fuel costs caused by the conflict.
In a sign of her focus on propping up growth, Takaichi has signaled the chance of compiling an extra budget to ramp up stimulus. Her reservations over near-term rate increases have not budged, two government sources told Reuters, with one saying the government may not nod to an April hike.
Ueda played down the likelihood of a rift, saying the government’s view on underlying inflation likely did not deviate much from that of the BOJ. With the weak yen and rising fuel costs piling inflationary pressure on Japan, markets still see roughly a 60% chance of an April rate hike.
But former BOJ executive Akira Otani, who is currently managing director at Goldman Sachs Japan, expects the central bank to wait until July for evidence the hit to profits from the Iran war does not discourage smaller firms from hiking wages.
“Given uncertainty over Middle East developments and comments from the government, we see the hurdle for an April rate hike as quite high,” he said. “For the BOJ, deciding on an April rate hike won’t be as easy as markets expect.”
(Reporting by Leika Kihara; additional reporting by Tamiyuki Kihara, Takaya Yamaguchi and Makiko Yamazaki; Editing by Sam Holmes)
