Japan's Central Bank Signals Confidence in Economic Recovery, Hints at Further Rate Hikes
The Bank of Japan (BOJ) held its two-day meeting on Friday, September 20, 2023, and kept interest rates steady at 0.25%. However, the central bank revised its assessment on consumption upwards, indicating its confidence in a solid economic recovery that could pave the way for further rate hikes in the coming months.
The BOJ acknowledged that private consumption has been on a moderate increasing trend despite the impact of rising prices and other factors. This assessment was more optimistic than the previous view that consumption was resilient.
BOJ Governor Kazuo Ueda emphasized that the central bank's decision on monetary policy will depend on economic, price, and financial developments at the time. He reiterated that Japan's real interest rates remain extremely low and that if the BOJ's economic and price forecasts are achieved, they will raise interest rates and adjust the degree of monetary support accordingly.
The BOJ's upbeat view on the outlook kept alive market expectations of a near-term rate hike. The yen pared losses and the Nikkei average saw gains shrink after the announcement.
Economists expect the BOJ to raise rates again this year, with most betting on a December hike. None in the poll projected a rate increase this month.
Core consumer inflation hit 2.8% in August, accelerating for the fourth straight month, keeping alive expectations for further rate hikes. The BOJ's next meeting, where they will conduct a quarterly review of their forecasts, is scheduled for October 30-31.
Japan's economy expanded an annualized 2.9% in April-June and real wages rose for two straight months in July, easing fears that rising living costs will dent consumption. However, soft demand in China, slowing U.S. growth, and the yen's recent rebound cloud the outlook for the export-reliant country.
Market volatility remains a key concern for BOJ policymakers after the July rate hike and hawkish remarks from Ueda triggered a spike in the yen and sharp falls in equity prices. Several BOJ policymakers have called for scrutinizing market moves in setting policy. But they also reiterated the bank's readiness to keep raising rates, with one hawkish board member saying short-term rates must eventually go up to around 1%.