Author: Leika Kihara
Tokyo (Reuters) – The Japan Bank, after being clearly signaling last week’s increase in interest rates, could return to its usual vague guidelines on the central bank policy to maintain flexibility when it eventually begins to consider how much the pesting is enough.
The battle made a mistake in a statement in December, surprising to investors when he left the rates stable, but then telegraphs to increase on Friday so unambiguously that the markets 90% estimated him and accepted that step.
This transition to clearer guidelines, an approach that US federal reserves used in August to signal a change in policy could prove to be temporary. Japanese policy creators are afraid of led by markets and are not sure how many battles can increase the rates without slowing down growth, say analysts and people familiarize the way of thinking of the central bank.
Policy creators are careful about the feeling that they have to give clear signals before each meeting, given the uncertain economic prospects, and they lack beliefs about the “neutral” interest rate of Goldilocks that neither cool nor overheat the economy.
After the battle captured the market unprepared by December, the Governor of the Cazuo Ueda marked the uncertainty of the US economic policy on the eve of the return of Donald Trump to the post of President as a key reason why she refrained from raising the rates.
Considering pigeon, Uedin’s comments reduced the market price of the action in January to 46% from 70%.
Wanting to avoid the reinstatement of the market, the battle then laid the foundations to increase in January, taking the page from President Fed Jerome Powell, who explicitly signaled the recent change by saying that “it was time for politics to adapt.”
Clarity costs
Ueda and his deputy Ryozo Himino said during the week before the increase on Friday that the Boj Boj Committee would “discuss whether he would raise rates” – in fact, announcing his decision to double short -term rates at 0.5%.
“Without these comments, an increase in January would be a big surprise,” said Naomi Mugurum, the main strategist for the Mitsubishi Ufj bonds (NYSE 🙂 Morgan Stanley (Nyse 🙂 Securities. “Fight he probably had no choice.”
Asked about previous warnings, Ueda said after a decision from Friday that she was just a “reminder” that the Committee would discuss the feasibility of a policy change in each audit rate.
However, although the strategy has enabled Boj to smoothly raise its reference rate at the highest in 17 years, it is not without cost.
Markets might focus too much on Boj comments, instead of carefully examining economic data and prices for prices, to evaluate the next increase in the bank’s interest rate, analysts say.
Giving explicit signals in advance, except for the battle to feel closed, it could break the Japanese law that stipulates that the nine -member committee must discuss and sign the decisions about the politics meetings.
“It causes an alarm,” the former politician said of a statement of a battle on the increase in the rates on Friday. “The market should be a guide to the central banks on how the economy works. But if this practice continues, the battle will only see a reflection of yourself on the market.”
‘Greater variability’
Another reason for the return of ambiguity is the uncertainty about the end point of tightening.
Boj staff estimates the Japanese nominal neutral rate between 1% and 2.5%. Although this has not been a factor with such a low interest rate so far, two more increases would bring it to the bottom of this range – a level that many analysts consider a neutral rate.
Indeed, while signaling the determination of the bank to continue to increase interest rates, Ueda gave several indications of a pace or a time of further increase on Friday and said that it was difficult to determine the Japanese neutral rate in real time.
“Since the battle does not know exactly where the neutral rate is, it would have to wait about six months after each increase to check the health of the economy,” said Kato Una, the main economist in Totan Research. “Only after evaluating that the neutral rate was still far away would he raise the rates again.”
Other complications are visible while the battle plans to further increase interest rates, which could increase the challenges in trying to persuade the public about the need to increase the costs of borrowing.
The bank justified an increase of Friday by stating the prospect of sustainable wage growth, but it is not sure if consumption can withstand the growing living costs.
Trump threats of higher customs duties could affect the Japanese economy that relies on export and business mood.
“Boy’s hands look more and more attached to the complex task of pricing pressures, trying to reflection and market expectations,” said Frederic Neumann, the main economist for Asia at HSBC Bank, adding that the risks surrounding Trump’s policy cannot be rejected.
“All this leads to a greater variability as far as the future policy rate is concerned.”
