BOJ Maintains Steady Rates and Improves Outlook on Consumption, According to Reuters

By Leika Kihara

TOKYO – The Bank of Japan maintained its interest rates on Friday and raised its outlook on consumer spending, indicating its confidence that a robust economic recovery will enable the central bank to implement another rate hike in the coming months.

As anticipated, the BOJ kept short-term interest rates at 0.25% during its two-day meeting, citing improved domestic conditions that support the gradual unwinding of years of expansive monetary stimulus.

"Private consumption has shown a moderate upward trend despite the effects of rising prices and other factors," the BOJ stated in its announcement.

This revised assessment is more positive than the previous view, which only described consumption as resilient.

"Our monetary policy decisions will depend on the economic, price, and financial conditions at that time," BOJ Governor Kazuo Ueda said during a press conference after the meeting. "Japan’s real interest rates remain exceptionally low. If our economic and price forecasts are realized, we will raise interest rates and adjust our monetary support accordingly."

The BOJ concluded its negative interest rate policy in March and raised short-term rates to 0.25% in July, marking a significant change from a decade of stimulus aimed at boosting inflation.

Following the announcement, the yen recovered some losses, and gains in the stock market diminished as the BOJ’s optimistic outlook fueled expectations of a potential rate hike soon.

"The improvement in the BOJ’s assessment of consumption suggests they are increasingly convinced that the economy is on track, with rising wages supporting household income and spending," noted Naomi Muguruma, chief bond strategist at Mitsubishi UFJ Morgan Stanley Securities. "If upcoming data reinforces the BOJ’s optimism, we could see another rate hike in December."

INFLATION ACCELERATES

Ueda has emphasized the BOJ’s readiness to raise rates if inflation continues to trend toward its 2% target, as currently projected. This stance is notably more hawkish compared to many other central banks, which are moving toward rate-cutting cycles, such as the recent significant rate decrease by the U.S. Federal Reserve.

A majority of economists surveyed expect the BOJ to raise rates again this year, with most anticipating a hike in December. None forecasted a rate increase for this month.

Core consumer inflation reached 2.8% in August, marking the fourth consecutive month of acceleration and sustaining expectations for additional rate hikes.

The BOJ’s next opportunity to assess data in relation to its forecasts will occur during its meeting at the end of October, which includes a quarterly review of its projections.

Japan’s economy grew at an annualized rate of 2.9% in the April-June period, and real wages have increased for two months in a row as of July, alleviating concerns that surging living costs might dampen consumer spending.

Nonetheless, weak demand from China, sluggish growth in the U.S., and the recent rise of the yen pose challenges for the export-driven economy.

Market volatility remains a crucial concern for BOJ officials following the July rate increase and Ueda’s hawkish comments, which resulted in a surge in the yen and significant declines in equity prices.

Several BOJ policymakers have emphasized the need to closely monitor market movements when forming policy. They reiterated the bank’s willingness to continue raising rates, with one hawkish member proposing that short-term rates should eventually approach around 1%.