MNI: BOJ's Himino Sees Gradual Hikes; Upside, Downside Risks

Bank of Japan Deputy Governor Ryozo Himino said Tuesday the Bank would raise its policy rate to adjust the degree of monetary accommodation if its baseline scenario for economic activity and prices materialises, though he gave no guidance on timing or pace.

“There are risks to economic activity and prices in both directions. Without any preconceptions, we will continue to monitor the economy closely to see if the baseline scenario unfolds as expected,” Himino told business leaders in Kushiro City.

He said it would be appropriate to raise the policy rate in line with improvements in activity and prices if the outlook holds, while stressing policymakers must constantly weigh upside and downside risks and respond flexibly to limit potential damage when conditions diverge from expectations.

Himino maintained the BOJ’s baseline view on prices, noting that headline inflation remains above the 2% target, driven by rice and spillover effects, but is expected to decline. Underlying inflation is still below 2% but gradually rising toward the target, supported by wage-price dynamics.

“The rise may experience some temporary halts, but the mechanism in which wages and prices rise in interaction with each other will be maintained and eventually push up the underlying inflation rate to 2%,” he said. While underlying inflation hovered between 0% and 1% through the 2010s, it has recently approached 2%, though has not yet reached the target, Himino added. MNI reported recently the BOJ would keep “underlying” CPI inflation as its key gauge for policy, allowing it to move cautiously on rate hikes and making a lift this year increasingly unlikely. (See MNI POLICY: Underlying Inflation Key For BOJ's Slow Hikes)

On trade, Himino warned the impact could prove larger than expected. “Our baseline scenario assumes that the effects of trade policies will eventually materialise, leading to a slowdown in overseas economies and a decline in domestic corporate profits,” he said, adding that Japan’s growth is likely to moderate. “There are risks in both directions, but at the moment, the risk of a larger-than-expected impact may deserve greater attention. Over time, however, with overseas economies returning to a moderate growth path, Japan’s growth rate is likely to rise,” he added.