Kihara Laika
TOKYO (Reuters) – Bank of Japan Governor Kazuo Ueda said the central bank may raise interest rates next month depending on prevailing economic data, underscoring its determination to steadily push borrowing costs up from near zero now.
Ueda told parliament on Tuesday that while rising import costs due to a weak yen may put pressure on household spending, rising wages will support consumption and put the economy on track for a moderate recovery.
“Our decision to reduce the size of our bond purchases and to raise interest rates are two different things,” Ueda said. “It is possible that we will raise interest rates at the next policy meeting, depending on the economic, price and financial data and information at the time.”
At Friday’s policy meeting, the Bank of Japan decided to start reducing its huge bond purchases and announced a detailed plan to reduce its balance sheet of nearly US$5 trillion in July, taking another step towards exiting large-scale monetary stimulus measures.
The decision heightened uncertainty over whether the Bank of Japan will raise interest rates at its July 30-31 meeting or delay it until later this year to avoid disrupting markets.
Ueda said the Bank of Japan is not yet fully convinced that inflation will sustainably reach its 2% target, stressing that it needs to spend “more time” reviewing the data before raising interest rates again.
But he said there was a clear change in companies’ price and wage-setting behavior amid record profits and a tightening job market.
He said that as nominal wages rise, “the economy may see clearer signs of a positive wage inflation cycle”.
Ueda did not provide any clues about the pace or scale of the bond tapering plan announced next month by the Bank of Japan. He said the central bank would avoid using bond buying operations as a monetary policy tool or as a means of communicating policy intentions.
The Bank of Japan exited negative interest rates and bond yield controls in March, a landmark shift from a decade-long aggressive stimulus program.
With inflation above its 2% target for two straight years, the Fed has given up signs that it will raise short-term interest rates to a level that will neither cool nor overheat the economy – a level that analysts say will Between 1% and 2%.
A weaker yen complicates the Bank of Japan’s policy path. Although it has pushed up the price of imported goods and accelerated inflation, the ensuing rise in the cost of living has dragged down consumption and cast doubt on Japan’s economic strength.
Many economists expect the Bank of Japan to raise interest rates to 0.25% this year, although they are divided over whether to do so in July or later this year.