By Kentaro Sugiyama and Leika Kihara
TOKYO (Reuters) -The Bank of Japan will debate whether to raise interest rates next week, Governor Kazuo Ueda said on Wednesday, signalling its intention to take borrowing costs higher barring a Trump-driven market shock.
The remarks, which echo those made by BOJ Deputy Governor Ryozo Himino on Tuesday, pushed up the yen as markets continued to price in the chance of a rate hike at the bank’s next policy meeting on Jan. 23-24.
Speaking at a gathering of regional bank executives, Ueda said the central bank would raise rates if improvements in the economy and prices continue.
Incoming U.S. President Donald Trump’s economic policy and momentum of this year’s wage negotiations in Japan are key in deciding the rate-hike timing, he said.
“There was a lot of positive talk on the wage outlook” when the BOJ’s regional branch managers met last week, Ueda said.
“We are currently analysing data thoroughly and will compile the findings in our quarterly outlook report. Based on that, we will discuss whether to raise interest rates at next week’s policy meeting and would like to reach a decision.”
The yen gained 0.5% against the dollar to hit 157.15 after Ueda’s remarks. The two-year Japanese government bond yield, which is sensitive to interest rate expectations, rose to 0.7%, the highest since October 2008.
While analysts polled by Reuters last month had predicted the BOJ would raise rates to 0.5% by end-March, they have been divided on whether the move would come in January or at a subsequent meeting on March 18-19.
Markets have focused on the BOJ’s views on wages and the U.S. policy outlook, after Ueda cited uncertainty over the domestic wage outlook and Trump’s policies as reasons to hold off raising rates last month.
Ueda’s upbeat view on the wage outlook suggests the only remaining hurdle to clear in hiking rates next week would be the risk of Trump’s remarks upending financial markets.
Deputy Governor Himino has said the “broad direction” of U.S. economic policy would likely become clear in Trump’s inaugural address on Monday.
“Domestic economic conditions seem rife for a policy shift with this year’s wage talks looking promising,” said a source familiar with the BOJ’s thinking. “But there’s a chance markets could turn volatile depending on what Trump says, which require vigilance,” the source said, a view echoed by two more sources.
ALL EYES ON U.S. POLICIES
The BOJ ended negative interest rates in March and raised its short-term rate target to 0.25% in July on the view Japan was on track to sustainably meet the bank’s 2% inflation target.
Ueda has signalled readiness to raise rates further if broadening wage hikes underpin consumption and allow companies to keep hiking prices not just for goods but services.
There has been growing evidence that companies will keep hiking pay to cope with intensifying labour shortages.
In a report released last week, the BOJ said wage hikes were spreading to firms of all sizes and sectors, signalling that conditions for a near-term rate hike were continuing to fall into place.
Prospects of sustained wage gains and the boost to import costs from a weak yen have heightened attention within the BOJ to rising inflationary pressures that may lead to an upgrade in its price forecast this month, sources have told Reuters.
Economy Minister Ryosei Akazawa said on Tuesday any plan by the BOJ to hike rates would not contradict the government’s goals, suggesting there was little political opposition to such a move.
UBS expects the BOJ to hike rates to 0.5% next week, void of a market shock caused by Trump, then raise rates again in July and December this year.
“Of course, if financial (risk) markets tumble with a panic-like magnitude after Trump’s inauguration on 20 January, the BOJ is unlikely to raise the rate and wait at least one more meeting. But, our current assumption is that there would be no significant shock on and after 20 January,” Masamichi Adachi, an economist at UBS, wrote in a research note.
(Reporting by Kentaro Sugiyama and Leika Kihara; Editing by Chang-Ran Kim, Shri Navaratnam, Sonali Paul and Alex Richardson)
