Weak yen may deter Bank of Japan from raising rates soon
The yen’s fresh slide to a 34year low complicates the Bank of Japan’s deliberations on the timing of a next interest rate hike, as a resulting rise in import costs pushes up inflation but also hurts the alreadyweak consumption and the broader economy.
If that weakness persists and discourages small firms from hiking pay, the central bank may prefer to wait at least until autumn before hiking, say five government officials and sources familiar with its thinking.
The BOJ is seen raising this year’s price forecast at the next meeting on April 26 and project inflation to stay near its 2% target through 2026, said two of the sources, underscoring its readiness to jack up rates from zero later this year.
Cut growth forecast
But the central bank is also likely to cut this year’s economic growth forecast in the fresh quarterly projections, due in part to sluggish consumption and factory output, they said.
“While wages might rise as projected, rising import prices from a weak yen could weigh on already soft consumption,” said one of the sources.
The inclination to go slow on interest rate hikes contrasts with the expectations of some currency traders and BOJ watchers who think the weak yen is a reason the central bank might lift rates soon.
That expectation is based partly on the BOJ’s tweaks last year to its bond yield control policy as efforts to cap longterm rates caused unwelcome yen declines that drew heat from politicians.
Former BOJ official Nobuyasu Atago said the central bank’s new “datadependent” approach would mean it will wait until the AprilJune gross domestic product data, due on August 15, to confirm whether growth would indeed rebound, before raising interest rates.
“Unless the yen’s fall become very rapid, the chance of the BOJ hiking rates by summer is very low,” said Atago, chief economist at Rakuten Securities Economic Research Institute.
Mixed blessing
The weak yen is a mixed blessing for the economy. While giving a boost to exports, the yen’s fall would hit households and smaller retailers by inflating the cost of fuel, food and raw material imports.
The fallout from the weak yen comes at a delicate time for the BOJ. Having ended eight years of negative interest rates last month, central bank policymakers are carefully gauging the right timing to hike rates again.
BOJ Governor Kazuo Ueda has said the threshold for another hike would be for big firms’ bumper wage hikes to spread to smaller firms, and services prices to rise more reflecting the increase in labour costs.
The signs have been mixed so far. Consumption has lacked momentum as rising living costs hit households, which may discourage firms from pushing up prices further.
The BOJ said in a recent report that smaller firms may hike wages by as much as last year or even more. But actual data on smaller firms’ pay won’t be available until later this year, analysts say.
“There are some positive signs on small firms’ wage outlook but actual wage increases aren’t broadbased yet,” said a source. “It might take until autumn to determine whether a positive wageinflation cycle is firmly in place.”
Waiting until autumn would eliminate the chance of a rate hike in June or July, and heighten the possibility of action in the BOJ’s September, October or December meetings. While the market’s favourite projection on the rate hike timing is in OctoberDecember, some analysts are betting on the chance of action in July after Mr. Ueda’s comments signalling scope of reducing monetary stimulus.