BOJ Heads Toward Rate Hike as Markets Take Trump in Stride
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BOJ Heads Toward Rate Hike as Markets Take Trump in Stride
Toru Fujioka and Sumio Ito
6 min read
(Bloomberg) -- Bank of Japan Governor Kazuo Ueda is on track to raise interest rates to the highest level since 2008 on Friday, after global financial markets responded with relative calm to US President Donald Trump’s return to the White House.
Ahead of Trump’s inauguration, BOJ officials saw a good chance of a rate hike at the end of this week’s two-day meeting, provided the president didn’t unleash too many negative surprises, people familiar with the matter told Bloomberg earlier this month.
Government officials will also go along with an increase this week, people familiar with the matter said in comments that followed the inauguration.
Should the hike materialize as widely expected, this would be Ueda’s third rate move in less than 12 months, after 17 years without an increase before last March.
A quarter-percentage point hike in the overnight rate to 0.5% would also be the biggest increment since 2007 as the BOJ makes steady progress toward normalization just as the Federal Reserve and the European Central Bank start to mull a pause in their easing cycles.
The yen has weathered the turmoil of Trump’s first days in office. It ended Tuesday little changed against the dollar after earlier outperforming all its Group-of-10 currency peers as traders wagered that the president’s first salvo of policy changes wouldn’t stop a potential rate hike from the BOJ. Japan’s Topix share index added to Tuesday’s limited gains to be up around 0.9% Wednesday lunchtime, while bond yields also edged up.
“The BOJ is going to raise rates,” said Chotaro Morita, chief strategist at All Nippon Asset Management Co. “There were no major shocks, and no tumbling of stocks on Trump’s first day.”
Given that borrowing costs in Japan would still be the lowest among developed nations even after a hike, how Ueda envisions the path toward further rate increases is likely to be a key focus on Friday. Given the global market turmoil that followed July’s rate hike, the governor will continue to be under close scrutiny for how he communicates.
Leading up to the meeting, the BOJ sent unusually clear signals that it was likely to adopt a higher rate. Deputy Governor Ryozo Himino said the board would discuss a hike in his speech last week, with Ueda reiterating his deputy’s message the following day. Those comments appeared to be clear hints dropped by the top brass at the BOJ.
Overnight-indexed swaps priced in over a 90% chance of the central bank raising the rate as of Wednesday morning, up from around 40% at the end of December. About three quarters of surveyed economists expect a move on Friday.
With those kind of expectations in place, the central bank would likely face a barrage of criticism over its signaling strategy if it didn’t follow through with a move.
BOJ watchers will more likely be looking for signs of more hikes to come as the policy rate inches closer to 1% — their current expected terminal rate.
“Raising the rate about once every six months will probably be the base case,” said Hirofumi Suzuki, chief FX strategist at Sumitomo Mitsui Banking. “The BOJ isn’t expecting rapid rate hikes.”
The central bank is also likely to raise its quarterly inflation projections at this week’s gathering, according to people familiar with the matter. That would show the cost of living staying around the central bank’s target level for the next two years, after already having done so for the past three years.
Hours before the BOJ decision on Friday, the latest inflation figures are expected to show an acceleration to 3% for the key gauge, well above the BOJ’s 2% target.
After public discontent over the cost of living played a primary role in toppling incumbent leaders around the world last year, the government of Prime Minister Shigeru Ishiba has so far suggested no objection against a hike this month. Ishiba’s approval ratings started off relatively low when he took the premiership in October, and have edged down since then.
Ishiba still has unfinished business to clear up with his spending plans. His minority government needs to secure enough opposition support to ensure the passage of the annual budget in March. A rate hike in January would essentially remove monetary policy as a complication in those negotiations.
Leaders of big business in Japan have also signaled their lack of opposition to a potential hike. Masakazu Tokura, the head of Keidanren, Japan’s largest business lobby, said it’s normal for the BOJ to review its interest rate policy now that inflation has remained above 2% for some time.
These developments are likely a relief for the BOJ, given memories of the fervent opposition it faced when raising rates in the 2000s.
At his post-meeting press conference, Ueda is likely to try and keep his options open as he cautiously proceeds with the bank’s first normalization efforts in almost two decades. The nation hasn’t seen the benchmark rate above 0.5% since 1995.
Ueda has acknowledged communication is challenging given that the bank doesn’t know its ultimate rate destination. Last month, the governor surprised BOJ watchers by sounding more dovish than expected, ramping up market views for a March hike. In July, he struck a clear hawkish tone as he raised borrowing costs, setting the stage for global market turmoil.
While 90% of economists see Japan’s economic conditions warranting a rate hike this month, many of them also say that a weak yen is likely to be a major reason to raise borrowing costs, and will remain so for future hikes.
Speculation of a BOJ rate hike this week has barely budged traders’ expectations of a weak yen, due to still wide yield differentials between Japan and the US.
Local retail investors as well as overseas hedge funds and asset managers have collectively boosted bearish yen wagers by 54% to $13.7 billion, according to Bloomberg analysis of data from the Tokyo Financial Exchange, Financial Futures Association of Japan and Commodity Futures Trading Commission.
The currency dropped to the lowest level in six months earlier this month, followed by verbal warnings from currency authorities hinting at readiness to intervene. In April, Ueda was forced to strengthen his comments over the weak yen after triggering its rapid depreciation — which helped push the government into direct intervention.
“The move toward a strong yen may be limited even with a rate hike” as the end of rate cuts is becoming a focus of the Fed, said Daisuke Karakama, chief market economist at Mizuho Bank. “Chances are high that markets will demand another rate hike sooner or later via yen selling.”
--With assistance from Masaki Kondo, Erica Yokoyama and Takashi Umekawa.
