The BOJ is likely to keep its promise of tight policy, raising rates next week, sources told Reuters

Author: Leica Kihara

TOKYO (Reuters) – The Bank of Japan 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 thinking said. .

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.

Unless Trump’s speech and the executive orders he issues next week cause serious market disruption, the BOJ is likely to continue raising rates, 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.

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.

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.

The BOJ also has no plans, at least for now, to offer details on Japan’s neutral rate beyond staff estimates that show it in a range of around -1% to 0.5% on an inflation-adjusted basis.

Staff estimates mean that if inflation expectations stabilize around the BOJ’s 2% target, the BOJ could raise its short-term rate to at least around 1% without slowing economic growth.

Ueda declined to specify the exact level of Japan’s neutral rate, saying it was too difficult to come up with credible estimates due to a lack of data.

Even if the BOJ raises rates next week, short-term rates will remain well below neutral levels, the sources said, adding that it was premature to discuss any major changes to its guidance on the future policy path.

“Given so much uncertainty in the outlook, it is impossible to predetermine a clear path or pace” of future policy moves, a third source said.

The BOJ ended negative interest rates in March and raised its short-term interest rate target to 0.25% in July on views that Japan is on track to sustainably meet the bank’s 2% inflation target.

Ueda has signaled a willingness to raise rates further if the spread of wage increases supports consumption and allows companies to contain the jump in prices not only for goods but also for services.