On December 19, 2023, the Japanese flag flew at the headquarters of the Bank of Japan in Tokyo.
Kazuhiro Nogi | AFP | Getty Images
The Bank of Japan is likely to discuss whether to raise interest rates at next week's meeting and unveil plans to roughly halve bond purchases over the next few years, sources said, signaling its determination to steadily ease its massive monetary stimulus.
Four people familiar with the BOJ's thinking said the rate decision will depend on how long board members are willing to wait to see whether consumption will recover and inflation can stabilize around the central bank's 2 percent target.
More than three-quarters of economists polled by Reuters expect the central bank to remain on hold this month, with the next move likely in September or October, but sources said the outcome of the July 30-31 meeting was less certain.
One source said that “this decision will be a close call and a difficult one” given the uncertainty about the consumption outlook. “It's really a matter of judgment whether to act now or later this year,” another person said.
They said that while the nine-member board generally agreed on the need for a near-term rate hike, there was no consensus on whether a rate hike should occur next week or later this year.
Core inflation hit 2.6% in June, exceeding the Bank of Japan's target for more than two years, while workers' inflation Basic wage May's increase was the highest in three decades, enough for hawks to believe conditions are now right for a rate hike.
However, recent weak consumer and household sentiment has helped policy doves make the case for holding off for now and waiting for more data to see whether tax cuts and wage increases will boost consumption as expected.
The outcome of next week's meeting is uncertain, sources said, in part because the Bank of Japan sees no compelling reason to act hastily, with price rises remaining modest and inflation expected to be stable around 2%.
“What is clear is that the Bank of Japan is likely to raise interest rates in the coming months. It is just a matter of time,” one of the people said.
Bank of Japan Governor Kazuo Ueda said the central bank would raise interest rates if it is convinced that solid growth in the economy and wages will keep inflation around 2% in the coming years as expected.
Although consumer prices in Japan have been rising since the COVID-19 pandemic, avoiding the long-term price declines the economy has experienced repeatedly over the past three decades remains a concern for Japanese policymakers.
After ending negative interest rates in March, the Bank of Japan still keeps short-term interest rates near zero. The next rate hike is expected to kick off a tightening cycle, raising interest rates to a level that neither cools nor stimulates economic growth (analysts believe it is about 0.5% to 1.5%), a process that could take years.
“There is still a long way to go for the Bank of Japan. Another rate hike will still keep Japan's monetary conditions very loose,” a second source said, a view echoed by two other sources.
At this month's meeting, the Bank of Japan will also unveil details of its quantitative tightening plan, including how it will scale back its massive bond purchases and shrink its nearly $5 trillion balance sheet over the next one to two years.
Sources said the Bank of Japan is likely to gradually reduce the size of its bond purchases in several stages, at a pace roughly in line with prevailing market views, to avoid causing an unwelcome spike in yields.
That raises the possibility that the Bank of Japan will roughly halve its monthly bond purchases in 1-1/2 to two years – a pace advocated by a significant number of participants at last week's meeting of the Bank of Japan and financial institutions.
The Bank of Japan ended eight years of negative interest rates and bond yield controls in March, a landmark shift in its aggressive stimulus program.