BOJ Policymakers Divided on Future Rate Hike Pace, July Minutes Reveal – By Reuters

By Leika Kihara

TOKYO – Minutes from the Bank of Japan’s July meeting revealed a split among policymakers regarding the pace of future interest rate increases, highlighting the uncertainty surrounding the timing of the next rate hike.

In July, the BOJ unexpectedly raised short-term interest rates to 0.25%, a decision supported by a 7-2 vote, marking a significant step towards reducing a decade of extensive monetary stimulus.

At least two members of the nine-person board expressed the view that rates could be raised further. One member suggested a "timely and gradual" approach to avoid the need for rapid adjustments in the future. Another indicated that an increase in rates should occur once there is clear evidence of businesses increasing capital spending, wages, and prices.

Conversely, several members cautioned against hastening the removal of stimulus. "Normalization of monetary policy must not be an end in itself," one member emphasized, urging careful monitoring of various risks. Another member warned against creating overly high market expectations for future rate increases, given that inflation expectations are not yet stabilized at the 2% target and price levels remain susceptible to downward pressures.

These discussions highlight the challenges faced by BOJ Governor Kazuo Ueda in fulfilling his commitment to eventually raise interest rates to a neutral level, which neither stimulates nor constrains economic growth. One member noted the difficulty of determining Japan’s neutral interest rate due to existing uncertainties.

The recent rate hike and Ueda’s assertive remarks, combined with weak labor market data from the U.S., led to a surge in the yen and a downturn in the stock market in early August. Since then, BOJ officials have emphasized the importance of considering the economic implications of market fluctuations.

Following the BOJ’s decision to maintain steady rates in September, Ueda reiterated that the bank would increase borrowing costs if inflation trends toward the 2% target sustainably. He also indicated that the BOJ could take its time to assess how uncertainties in the U.S. economy could affect Japan’s fragile recovery, signaling no immediate rush to raise rates further.

Core consumer inflation reached 2.8% in August, remaining above the BOJ’s 2% target for 29 consecutive months. Japan’s economy recorded an annualized growth of 2.9% in the second quarter, supported by consistent wage increases that bolstered consumer spending. However, the outlook for Japan’s export-oriented economy remains clouded by weak demand from China and slowing growth in the U.S.