By Max Sato
(MaceNews) – The Bank of Japan board is widely expected to maintain its policy stance at its two-day meeting this week and wait until its next meeting on Sept. 20-21 to follow up on its first rate hike in 17 years in March by raising the overnight interest rate target to 0.25% from the current range of zero to 0.1%.
Governor Kazuo Ueda has said underlying inflation estimated by the bank is moving up but still below its 2% target. The Tokyo CPI data for July showed a slower rise in services costs, indicating the fastest wage hikes in 33 years mainly at large firms have not yet spread to small businesses which employ about 70% of the workforce.
The board is scheduled to decide at its July meeting on how fast it should reduce its purchases of Japanese government bonds over a year to two years following consultation with market participants. It is expected to slow the pace of monthly JGB purchases to about ¥3 trillion to ¥4 trillion from about ¥6 trillion now.
Last month, the board decided in a unanimous vote to hold the overnight interest rate target steady and also voted 8 to 1 to set the stage for gradually reducing the bank’s large holdings of various financial assets as part of its policy normalization process aimed at reviving the functions of bond markets that were paralyzed by years of flooding the markets with cash.
Ueda called it “a gentle move” but denied that it would be a small reduction. “We will reduce at a suitable pace,” he told reporters after the June policy decision.
The bank’s policy decision after the July 30-31 meeting is expected to be announced sometime between 1130 and 1230 JST Wednesday (0230 and 0330 GMT Wednesday/2230 and 2330 EDT Tuesday). The results of its June 13-14 meeting were released shortly after it ended at 1216 JST (0316 GMT/2316 EDT).
The bank will also release the quarterly Outlook Report in which it will provide an update on the board’s medium-term growth and inflation outlook as well as risk analysis. No major change is expected to its April projections: The year-on-year increase in the core CPI (excluding fresh food) was forecast at 2.8% in fiscal 2024 ending in March 2025, 1.9% for both fiscal 2025 and 2026; GDP growth at 0.8% in the current fiscal year, followed by 1.0% in the next two years.
The current inflation rate around 2% is largely stemming from higher import costs, first brought on by global supply constraints, and then fueled by the persistently weak yen that is eroding Japan’s purchasing power. The BOJ calls it the primary wave of price rises. This has kept real interest rates below zero in Japan, adding downward pressures to the yen and pushing up asset prices, but super-low borrowing costs are not boosting economic activity. The economy needs a secondary wave of inflation backed by wage hikes.
By waiting until the Sept. 19-20 meeting, BOJ officials will be able to see more signs as to whether wage hikes announced by major firms in April for the current fiscal year, up 5.1% in the weighted average and the highest rate in 33 years (base wages are up 3.6%), are spreading to smaller firms in the government’s monthly labor survey, with June preliminary data due on Aug. 6 and July initial data on Sept. 5.
There will also be more CPI data to confirm whether various service providers are raising wages and reflecting them in the prices that they charge. The July CPI is due on Aug. 23 and the August report on Sept. 20.
If the BOJ decides to raise rates in September or October and the economy picks up with substantial and sustainable wage hikes that more than compensate price rises, it may be able to conduct another rate hike early next year. But the prospects for further action are uncertain.