EXCLUSIVE: BOJ to Raise Policy Rate Next Week

Tokyo, Dec. 12 (Jiji Press)–The Bank of Japan is likely to raise its policy interest rate to around 0.75 pct from around 0.5 pct at present at its next monetary policy meeting scheduled next week, Jiji Press learned Friday. It will be the BOJ’s first rate hike since January and the first in seven policy meetings. The bank’s policy rate has not exceeded 0.5 pct since September 1995. The expected decision at the two-day Policy Board meeting from Thursday will take the rate to the highest level in about 30 years. The BOJ will resume its monetary policy normalization as companies in Japan are expected to offer further wage increases in next year’s “shunto” annual labor-management negotiations in spring on the back of rosy earnings. It will be the first time for the BOJ to raise the policy rate since the launch of the administration of Prime Minister Sanae Takaichi in October. Import prices would soar and inflation may accelerate if the central bank forgoes a rate increase at the upcoming policy meeting and the yen falls rapidly as a result. Therefore, the government, which puts importance on measures to combat inflation, will likely tolerate a rate increase. The BOJ will decide to raise the policy rate on Dec. 19, the final day of the two-day policymaking meeting, after confirming whether unexpected events will occur, such as a stock market tailspin or political turmoil. After raising the policy rate in January, the central bank suspended the process of exiting from its large-scale monetary easing, due to concern about impacts of the high tariff policy of the administration of U.S. President Donald Trump. Later, the BOJ indicated that it would resume interest rate increases if it comes to believe that the wage hike momentum will continue in the lead-up to the 2026 shunto. The impacts of the U.S. tariff policy on the Japanese economy are now seen to be smaller than initially expected partly because Japan and the United States reached a tariff deal in July. The central bank apparently believes that a certain level of wage hikes will continue in next year’s shunto as a result of hearings from companies conducted through its head office in Tokyo and regional branches. The BOJ thinks that the probability of its 2 pct inflation goal being achieved is increasing, with improvements in the economy and prices seen continuing. Financial markets’ attention has started shifting to the pace of the BOJ’s future rate hikes and the neutral interest rate level, which neither stimulates nor cools the economy. The BOJ currently estimates that the neutral rate is somewhere between 1.0 and 2.5 pct. At a press conference in the central Japan city of Nagoya on Dec. 1, BOJ Governor Kazuo Ueda said, “I’ll be a little clearer in my thoughts about how far” the policy rate is from the neutral rate. END [Copyright The Jiji Press, Ltd.]