The Bank of Japan is certain to raise interest rates further. The question is when.
TOKYO, JAPAN – AUGUST 23: Bank of Japan Governor Kazuo Ueda attends a meeting of the finance committee at the lower house of parliament on August 23, 2024 in Tokyo, Japan.
Tomohiro Ohsumi | News Getty Images
The Bank of Japan is widely expected to continue its monetary policy tightening campaign as inflationary pressures in the capital Tokyo reaffirmed the bank’s economic forecasts.. But market participants remain divided on the timing of the next rate hike.
“I’m betting on another rate hike in October,” Stefan Angrick, senior economist at Moody’s Analytics, told CNBC via email. He expects that rate hike to be followed by at least one more in 2025, possibly as early as January.
Japan is likely to see continued “spiking” inflation in the near term, Angrick said, noting the government’s efforts to cut energy subsidies. While Prime Minister Fumio Kishida has pledged to expand support for household utility bills, he acknowledged that these measures “are not enough to offset the effects of the current economic downturn.”can not go on forever“
However, Kazuo Momma, a former BOJ official and now an executive economist at Mizuho Research & Technologies, expects the central bank to leave rates unchanged in October. His base case includes a rate hike in January to 0.5% and a further 0.75% hike in July. Momma said that would put Japan’s monetary policy at the end of this tightening cycle.
On Friday, data showed Headline inflation for Japan’s capital Tokyo accelerated to 2.6% in August from a year earlier, up from 2.2% in July. Core inflation, which strips out the volatile cost of fresh food, rose 2.4% from a year earlier. That was faster than the median market forecast and the July reading of 2.2%, accelerating for the fourth straight month.
However, Momma said “momentum is not yet strong enough” for the BOJ to raise interest rates. As the central bank monitors risks in global financial markets, he said the BOJ “has no reason to rush at this point.”
The upbeat monthly CPI data has been tempered by a recent “policy shift,” Moody’s Angrick said, referring to some counterproductive policies being implemented. He explained that the government has provided some subsidies while scaling back other support measures, which he said shows “a reluctance to provide effective support.”
Angrick said price pressures were driven by still-weak demand and softening employment conditions, noting that the upcoming election of the Liberal Democratic Party added further uncertainty to the future policy path.
Japan unemployment rate The unemployment rate also rose to 2.7% in July, up 0.2 percentage point from June, according to government data released on Friday. Economists polled by Reuters had expected the July unemployment rate to be 2.5%.
“At best, further rate hikes will hamper growth, and at worst they could trigger a broader recession,” Angrick said.
Tokyo’s CPI is a leading indicator of nationwide trends and has risen as wages nationwide have risen and the government moves to phase out energy subsidies, coupled with a weak yen.
But Marcel Thieliant, Asia-Pacific director at Capital Economics, wrote in a note to clients that core inflation will fall below 2% in the coming months.
BOJ surprised the market in July by raising interest rates to 0.25%, the highest level in 15 years, and outlining plans to scale back its massive bond-buying program.
BOJ Governor Kazuo Ueda recently told Congress The central bank is ready to raise borrowing costs further if inflation continues to rise above its 2% target.
