Written by Laika Kihara
TOKYO (Reuters) – The Bank of Japan is likely to raise interest rates next week unless there are any shocks to the market when U.S. President-elect Donald Trump takes office, five Bank of Japan experts said, maintaining his pledge to continue raising borrowing costs if the economy continues to recover. . Sources familiar with her thinking.
However, the sources said the central bank would likely not provide clear guidance on the pace of future interest rate hikes or how far it could eventually raise them.
Under its current guidance, the Bank of Japan pledges to continue raising interest rates in the short term if economic developments and prices move in line with its expectations.
“For the Bank of Japan, there is not much to add or change in this guidance as real interest rates remain very low,” one source said, a view echoed by another source.
Governor Kazuo Ueda and his deputy governor said earlier this week that the Bank of Japan will discuss whether to raise interest rates, signaling its intention to raise borrowing costs at the January 23-24 meeting unless Trump's inauguration speech on Monday upends markets.
As a result, markets have expected a probability of more than 80% that short-term interest rates will rise from 0.25% to 0.5% next week, which would raise interest rates at the Bank of Japan to levels not seen since 2008.
“They are saying, without saying, that we will go up,” DeepMacro CEO Jeffrey Young said of the comments by Ueda and Deputy Governor Ryuzo Himeno.
“We have growth on trend, the output gap has largely closed and become positive, and inflation is at or above target. Why do we keep the nominal interest rate at 25 basis points, which is very negative in real terms?”
The sources, who spoke on condition of anonymity because they were not authorized to speak publicly, said that unless Trump's speech and any executive orders he issues next week lead to severe market turmoil, the Bank of Japan is likely to go its own way.
“The market seems to have understood the BOJ’s message,” one of the sources said.
Another source said: “Although a rate hike next week is certainly not a done deal, the only remaining hurdle is what Trump might say and how markets might react.”
Prices are far from neutral
With a rate hike next week considered almost certain, the market's attention is turning to any clues the Bank of Japan may provide on the pace and timing of additional increases.
The Bank of Japan is likely to raise its inflation forecasts in its quarterly forecast report and may highlight upside risks as continued weakness in the yen keeps import costs high, the sources said.
While many analysts expect the Bank of Japan to raise interest rates to 0.75% in the latter half of this year, the bank likely will not provide much clues about the timing of its next move, the sources said.
The Bank of Japan also has no plan, at least for now, to provide details on Japan's neutral interest rate beyond staff estimates that show it ranges from -1% to 0.5% at the inflation-adjusted level.
Expert estimates mean that if inflation expectations stabilize around the Bank of Japan's 2% target, it is possible for the Bank of Japan to raise the short-term interest rate to at least around 1% without cooling economic growth.
Ueda declined to specify the exact level of Japan's neutral interest rate, saying it is very difficult to come up with reliable estimates due to a lack of data.
Even if the Bank of Japan raises interest rates next week, short-term interest rates will remain well below neutral levels, the sources said, adding that it is too early to discuss any major change in its guidance on the future policy path.
“Given so much uncertainty about the outlook, it is impossible to set a clear path or pace in advance” for future policy moves, a third source said.
The Bank of Japan ended negative interest rates in March and raised its short-term interest rate target to 0.25% in July on the view that Japan is on track to meet the bank's 2% inflation target sustainably.
Ueda indicated a willingness to raise interest rates further if expanding wage increases supports consumption and allows companies to continue raising prices not only for goods but for services.
