If such weakness persists and small businesses are discouraged from raising wages, the central bank may prefer to wait until at least the fall to raise rates, according to five government officials and people familiar with the thinking.
of Bank of Japan According to two sources familiar with the matter, the Bank is expected to raise its price forecasts for this year at its next meeting on April 26, with inflation expected to remain around the 2% target until 2026 and the Bank prepared to raise interest rates from zero by the end of the year. I emphasized one thing.
However, the central bank is likely to revise its economic growth outlook for this year downward in its new quarterly forecasts, in part due to weak consumption and factory production.
„Wages may rise as expected, but higher import prices due to the weaker yen could put pressure on already weak consumption,“ one of the sources said.
The tendency to delay rate hikes is in contrast to the expectations of some currency traders and BOJ watchers, who believe the weaker yen is the reason the central bank could raise rates soon. Part of the basis for this expectation is that the Bank of Japan tweaked its bond yield control policy last year as efforts to cap long-term interest rates triggered an undesirable depreciation of the yen, which attracted enthusiastic support from politicians. .Former Bank of Japan official Nobuyasu Atago The central bank's new „data-dependent“ approach means it will wait until the April-June gross domestic product (GDP) report, due on August 15, to see if growth actually recovers before raising interest rates. said to mean.
“Unless the yen depreciates very quickly, it is very unlikely that the Bank of Japan will raise rates before the summer,” Chief Economist Atago said. Rakuten Securities Economic Research Institute.
mixed blessing
A weaker yen has some positive aspects for the economy. While a weaker yen will encourage exports, it will raise the cost of importing fuel, food and raw materials, hurting households and small retailers.
The impact of the weaker yen comes at a delicate time for the Bank of Japan. Eight years of negative interest rate policy ended last month, and central bank policymakers are carefully assessing the right time to raise rates again.
Bank of Japan Governor Kazuo Ueda said the criteria for raising interest rates again would be for large companies to see significant wage hikes that would spread to small and medium-sized businesses, causing service prices to rise further to reflect higher labor costs.
So far, the signs are mixed. Consumption is lacking momentum as rising living costs hit household budgets, potentially discouraging businesses from raising prices further.
The Bank of Japan said in a recent report that small and medium-sized enterprises could raise wages by the same amount or more than last year. But analysts say actual data on small business payrolls won't be available until later this year.
„There are some positive signs in the wage outlook for small and medium-sized businesses, but actual wage increases are still not widespread,“ one of the people said. „It may take until the fall to determine whether the virtuous cycle of wage inflation is firmly entrenched.“
Waiting until autumn eliminates the possibility of a June or July rate hike, and increases the likelihood of a rate hike at the Bank of Japan's meetings in September, October, or December.
The market's best guess for when to raise interest rates is between October and December, but some analysts believe that action could take place in July after recent comments from Mr. Ueda hinting at the scope for tapering monetary stimulus. We are betting on the possibility that this will be implemented.
While the yen's movements have contributed to economic conditions that have triggered changes in Bank of Japan policy in the past, central bank policy itself does not explicitly target the currency.
In this regard, Ueda said that the Bank of Japan is prepared to respond if movements in the yen have a significant impact on the economy or inflation.
For now, however, concerns about Japan's fragile economy are spreading, and the Bank of Japan is likely to become cautious in its actions. Two of the Bank of Japan's nine board members opposed the March decision to end negative interest rates. Even hawkish policymakers like Naoki Tamura say they prefer a „slow and steady“ approach going forward.
Political factors are also raising the hurdles for early interest rate hikes. On the day the Bank of Japan ended negative interest rates, Prime Minister Fumio Kishida told reporters, „It is appropriate for the accommodative financial environment to continue,'' indicating his desire for ultra-low interest rates to continue.
A senior ruling party official told Reuters, „There was no problem with lifting negative interest rates, but further rate hikes are out of the question.''
„Consumption is sluggish and it is unclear whether inflation will continue to rise,“ a Treasury official said. „There is no reason for the Bank of Japan to rush to raise interest rates again.“