Sources say the BOJ is likely to keep its promise of tightening policy and raise rates next week
Author: Leika Kihara
TOKYO (Reuters) – Japan’s central bank is likely to raise interest rates next week barring any market shocks when U.S. President-elect Donald Trump takes office and keeps his promise to keep raising borrowing costs if the economy continues to recover, five sources familiar with his policy said. by thinking.
However, the central bank is unlikely to offer explicit guidance on the pace of future rate hikes or how much it might eventually raise, the sources said.
Under its current guidance, the BOJ is committed to continuing to raise its short-term interest rate if economic and price developments move in line with its forecasts.
“As far as the BOJ is concerned, there is not much to add or change to this guidance given the still very low real interest rates,” one of the sources said, a sentiment echoed by another source.
Governor Kazuo Ueda and his deputy said earlier this week that the BOJ would debate whether to raise interest rates, signaling its intention to raise borrowing costs at a Jan. 23-24 meeting unless Trump’s inauguration speech on Monday turns markets around.
As a result, markets have pegged a more than 80% chance of an increase in short-term rates from 0.25% to 0.5% next week, which would push the BOJ’s benchmark rate to levels not seen since 2008.
“They’re kind of saying, without saying, let’s hike,” said Jeffrey Young, chief executive officer of DeepMacro, in response to comments from Ueda and Deputy Governor Ryozo Himino.
“You have trend growth, the output gap is fairly closed and turning positive, and inflation is at or above target. Why keep the nominal policy rate at 25 basis points, which is deeply negative in real terms?”
Unless Trump’s speech and the executive orders he issues next week cause serious market disruption, the BOJ is likely to proceed, said the sources, who spoke on condition of anonymity because they were not authorized to speak publicly.
“The market seems to have got the BOJ’s message,” one of the sources said.
“While a hike next week is certainly not a done deal, the only remaining hurdle is what Trump might say and how markets might react,” another source said.
PRICES ARE FAR FROM NEUTRAL
With a hike next week seen as a near certainty, market attention is shifting to any clues the BOJ can offer on the pace and timing of further hikes.
The BOJ is likely to raise its inflation forecasts in the quarterly outlook report and could highlight upside risks as a persistently weak yen keeps import costs high, the sources said.
While many analysts expect the BOJ to raise rates to 0.75% in the second half of this year, the bank is unlikely to give much indication of the timing of its next move, the sources said.
