By Leika Kihara and Makiko Yamazaki
TOKYO (Reuters) – The Bank of Japan maintained ultra-low interest rates on Thursday but said risks around the U.S. economy were somewhat subsiding, signalling that conditions are falling into place to raise interest rates again.
The central bank also projected inflation would move around its 2% target in the coming years, stressing its resolve to keep raising borrowing costs if the economy sustains a moderate recovery.
“Looking at domestic data, wages and prices are moving in line with our forecasts. As for downside risks to the U.S. and overseas economies, we’re seeing clouds clear a bit,” Governor Kazuo Ueda told a news conference.
Ueda’s remarks were less dovish than those made before Thursday’s meeting that the BOJ can “afford to spend time” scrutinising the fallout from risks such as U.S. economic uncertainties and volatile financial markets.
The dollar briefly fell to 151.92 yen from levels above 153 yen after Ueda’s remarks, which were interpreted as heightening the chance of a rate hike in December.
“As for the timing of the next rate hike, we have no preset idea. We will scrutinise data available at the time of each policy meeting, and update our view on the economy and outlook, in deciding policy,” Ueda told the news conference.
As widely expected, the BOJ kept short-term interest rates at 0.25% at its two-day meeting, its first since an inconclusive general election that analysts say will complicate efforts to normalise interest rates after years of ultra-easy policy.
NEW RISKS MAY EMERGE
The BOJ had said it could “afford to spend time” scrutinising risks after its rate hike in July, and weak U.S. jobs data, triggered a sharp yen spike and a global market rout.
Markets have restored some calm since then, as a slew of robust data diminished market fears of a U.S. recession.
“When we used language that we can ‘afford to spend time’ gauging risks, weak U.S. jobs data led to volatile market moves, which we saw as having a grave impact on Japan’s economy,” Ueda said. “Since then, we have seen some fairly good U.S. data.”
But Ueda stressed the need to stay vigilant to overseas and market developments, saying new risks could emerge depending on who becomes the next U.S. president at the Nov. 5 election.
“Ueda’s remarks sounded somewhat hawkish,” said Hiroshi Watanabe, senior economist at Sony Financial Group.
“Many market players had bet that the next rate hike will come in the January-March quarter next year. But he sounded as if he left open the chance of a December hike,” he said.
The BOJ next meets for a policy meeting on Dec. 18-19, followed by another meeting on Jan. 23-24.
In its quarterly outlook report, the BOJ repeated that it expects underlying inflation to converge around 2% sometime around late 2025 or beyond, as service prices continue to rise moderately.
The board cut its core consumer inflation forecast for fiscal 2025 to 1.9% from 2.1% in the previous estimate in July, but said risks were skewed to the upside for that year. It kept unchanged its fiscal 2026 core inflation forecast at 1.9%.
“If we see wages rise at around the same level of this year, that would be a positive development for us,” Ueda said when asked about prospects for next year’s wage talks between firms and unions. “But that alone won’t directly lead to rate hikes.”
The BOJ ended negative rates in March and raised short-term rates to 0.25% in July on the view Japan was making progress towards sustainably achieving its 2% inflation target.
Ueda has repeatedly said the BOJ will keep raising rates if the economy moves in line with its forecast.
The ruling coalition’s loss of a majority in a weekend election has heightened concerns about policy paralysis, which could raise the hurdle for additional rate hikes, analysts say.
“Recent political developments alone won’t directly affect our price forecasts,” Ueda said. “But if there are big changes in policy, we will revise our forecasts as needed taking into account the impact of such moves.”
A slim majority of economists polled by Reuters on Oct. 3-11 expected the BOJ to forgo a hike this year, though most expect one by March.
(Reporting by Leika Kihara, additional reporting by Makiko Yamazaki, Kantaro Komiya and Satoshi Sugiyama; Editing by Sam Holmes and Jacqueline Wong)
