Author: Leica Kihara
TOKYO (Reuters) – The prospect of sustained wage growth in Japan and an increase in import costs due to a weak yen have heightened attention within the central bank to rising inflationary pressures that could lead to an improvement in its price forecast this month, sources said.
Even if the Bank of Japan were to raise its inflation forecast, the hike by itself would not lead to higher interest rates if it was driven by temporary factors such as rising rice prices and higher import costs, three sources familiar with the bank’s thinking said.
The BOJ could raise rates this month if management is convinced that sustained, broad-based wage increases will take hold and keep inflation permanently at the 2% target, they said.
“Risks to inflation are tilted to the upside due in part to a renewed weakening of the yen,” one of the sources said, a sentiment echoed by another source.
“Wages momentum also appears to be strong,” a third source said, adding that the committee may discuss revising its inflation forecast for the fiscal year starting in April.
The BOJ is likely to discuss whether to raise interest rates from the current 0.25% at its January 23-24 policy meeting. It will also publish new quarterly growth and price forecasts that serve as a basis for setting monetary policy.
Under current forecasts, the committee expects core consumer inflation to reach 1.9% for fiscal 2025 and 2026. Although the committee has yet to discuss the details of its forecasts, recent data and surveys have pointed to rising inflationary pressures.
The yen is currently trading at 158 to the dollar, down from around 140 yen in September and close to levels reached when the BOJ raised rates last July.
Core inflation accelerated to 2.7% in November as a weak yen pushed up import costs, contributing to stubbornly high rice prices.
Rising wages are adding to inflationary pressure, supporting the BOJ’s argument that Japan is on track to sustainably reach its 2% inflation target – a prerequisite for further rate hikes.
Wage increases are spreading across companies of all sizes and sectors, the BOJ said in a quarterly report on Thursday, signaling that the conditions for a near-term rate hike continue to build.
“The need for wage increases is more prevalent among small firms,” Kazushige Kamiyama, head of the BOJ’s Osaka branch, said at a news conference on Thursday. “We can expect solid wage growth this year.”
While such optimism raises the possibility of an interest rate hike at the BOJ’s January meeting, Governor Kazuo Ueda cited uncertainty surrounding US President-elect Donald Trump’s policies as a reason to be cautious about raising borrowing costs.
If comments and policies announced after Trump’s Jan. 20 inauguration cause volatile market movements, the BOJ could delay raising rates again, some analysts say.
Markets are focused on a speech and news conference by BOJ Deputy Governor Ryozo Himino on Tuesday for further clues on whether the bank could raise rates this month.
