MNI: BOJ Opinions: Early Rate Hikes, Upside Risks to Prices

Several Bank of Japan board members saw the need to raise the policy interest rate relatively early, with one favouring hikes at intervals of a few months, according to the summary of opinions from the Jan. 22-23 meeting released Monday.

“It is appropriate for the Bank to raise the policy interest rate at intervals of a few months, while examining the impact of rate hikes on firms' and households' behaviour through anecdotal information and assessing the current policy interest rate relative to the neutral rate,” said one member at the meeting, which saw the policy rate hold at 0.75%. (See MNI BOJ WATCH: Ueda Points To Hikes, Gives No Clues On Timing) 

“Given that addressing rising prices is an urgent priority in Japan, the Bank should not take too much time examining the impact of raising the policy interest rate, and should proceed with the next step, a rate hike, without missing the appropriate timing,” another member said. 

A different member noted the depreciation of the yen and the rise in long-term interest rates largely reflect fundamentals, such as inflation expectations. "In this situation, the only prescription from the monetary policy side is to raise the policy interest rate in a timely and appropriate manner.”

“It cannot be said that the risk of the Bank falling behind the curve has necessarily become more evident, but it is becoming even more important for the Bank to conduct monetary policy carefully and in a timely manner,” another member continued.

Markets have priced in a 50% chance of a 25bp hike at the April meeting, with a 1.218% rate by December. 

UPSIDE PRICE RISK

While the BOJ said risks to prices were generally balanced, several members highlighted growing upside risks.

One member said, “Given the change in the wage norm, and with growing expectations of a recovery in overseas economies, it is necessary to pay more attention to the upside risks to prices when considering the risk balance.”

Another member said, “With Japan's economy facing labor supply constraints, risks to prices have become more skewed to the upside, as seen in, for example, the pass-through to prices of the yen's depreciation, an expansion in demand driven by fiscal policies, and China's restrictions on exports to Japan.”

A different member said, “With the yen's depreciation, it appears that even low-priced imported goods have become less likely to push down prices. Moreover, dependence on imports has also been rising in domestic demand. Against this background, it has become more likely that exchange rate factors will push up prices.”

Another member said, “In recent years in Japan, firms' price-setting behavior has been undergoing significant change, and the pass-through to prices of higher import prices caused by the yen's depreciation has become more pronounced. Given this, it is necessary to pay closer attention to the effects of foreign exchange rates on prices. If the yen depreciates further, it is possible that the rate of increase in the CPI will decline at a slower pace and start to rise.”