MNI BOJ WATCH: Holds, But Ueda Signals Hike Likely Near

Bank of Japan Governor Kazuo Ueda indicated that the BOJ may be close to raising its policy interest rate amid concerns over the second-round effects of high crude oil prices despite a slowing economy, but it held rates on Thursday amid the elevated uncertainty of the Iran war.

The BOJ will determine its monetary policy in a timely manner at its April meeting, depending on data and information available at the time, Ueda said, noting that it will be possible for the Bank to raise its policy rate at some point if it judges that the economic slowdown is temporary and does not affect underlying CPI inflation..

Speaking after the BOJ’s board voted eight-to-one to keep the policy interest rate unchanged at 0.75%, Ueda told reporters that more members are concerned about upside risks to prices than downside risks.

“Policymakers actively discussed the impact of elevated crude oil prices at the meeting. Some are worried about upside risks to prices and others about downside risks. More members are worried about the former,” Ueda explained, declining to specify which risk personally concerns him more.

“If high crude oil prices continue, they will exert downward pressure on the economy, which in turn will worsen the output gap and then lower underlying CPI inflation,” he said, adding, “Meanwhile, high crude oil prices and the weak yen would exert upward pressure on the medium- to long-term inflation expectations, and then will strengthen underlying CPI inflation.”

Ueda said that the bank’s baseline scenario is unchanged, though it might be endangered by high crude oil prices. (See MNI POLICY: BOJ To Check Main Scenario, Risk Balance In April)

LONE DISSENTER

Board member Hajime Takata was the lone dissenter, calling for a hike to 1%, and arguing that the price stability target had been more or less achieved and warning of the second-round effects of price rises.

The BOJ maintained its policy stance of gradually raising the policy rate to adjust the degree of accommodation if the outlook for economic activity and prices is realised. The Bank will conduct monetary policy in an appropriate manner with a view to achieving the 2% target in a stable and sustainable manner, the governor said.

However, the BOJ warned, “in the wake of increased tension over the situation in the Middle East, global financial and capital markets have been volatile and crude oil prices have risen significantly; future developments warrant attention.”

Wage hikes at major firms are strong, Ueda said, referring to a key gauge for the BOJ as it assesses the likelihood of achieving its 2% target.

Japan's large corporations are expected to offer wage increases of 5% or more for a third straight year, with many companies announcing results of annual spring wage talks next Wednesday. The preliminary tabulation of wage agreements will be released on March 23 by the Japanese Trade Union Confederation, or Rengo.

Ueda also said that the BOJ will refine its measures of core CPI to better capture underlying inflation, a task which will be made more difficult by swings in crude oil prices.

Bank officials will also revise estimates of potential growth and the neutral interest rate as GDP data is revised, Ueda said, adding that the BOJ will release them as soon as they are ready, possibly in the summer.