Sources say that the BOJ will keep its hawkish policy promise and raise rates next week
By Leica Kihara
TOKYO (Reuters) – The Bank of Japan is likely to raise interest rates when U.S. President Donald Trump takes office next week, barring any market shocks, and has vowed to keep borrowing costs under control if the economy continues to grow. Sources familiar with his thinking.
However, the central bank will not give clear guidance on the pace of future rate hikes or how much it will ultimately raise, the sources said.
In its current guidance, the BOJ has pledged to raise the short-term policy rate if economic and price developments are in line with forecasts.
“For the BOJ, there is not much to add or change to this guidance given the still very low real interest rates,” one of the sources said, echoing another source.
Governor Kazuo Ueda and his deputy will debate whether the BOJ will raise interest rates earlier this week, signaling its willingness to take on higher borrowing costs at its Jan. 23-24 meeting, unless Trump’s inaugural speech on Monday boosts markets.
As a result, markets have priced the probability of a hike in short-term rates from 0.25% to 0.5% next week to more than 80%, bringing the BOJ’s policy rate to a level not seen since 2008.
“They kind of go without saying,” DeepMacro CEO Jeffrey Young said of Ueda and Vice Governor Ryozo Himino’s comments.
“You have trend growth, the output gap is very close and positive, and inflation is at or above target. Why is nominal policy keeping the pace at 25 basis points, which is deeply negative in real terms?”
Unless Trump’s speech and any executive orders next week cause serious market disruption, the BOJ will likely continue, the sources said, speaking on condition of anonymity because they were not authorized to speak publicly.
“The market seems to have gotten the BOJ’s message,” one of the sources said.
“While a hike next week is certainly not a done deal, the only remaining hurdle is what Trump might say and how markets might react,” another source said.
Rates far from neutral
With next week’s hike seen as a near-certainty, market attention is shifting to any clues the BOJ may provide on the pace and timing of further hikes.
The sources said the BOJ would raise its inflation forecast in its quarterly outlook report and raise the cost of imports from a persistently weak yen, the sources said.
While many analysts expect the BOJ to raise rates to 0.75% by the middle of this year, the bank will not give much indication on the timing of its next move, the sources said.