BOJ Discussed Need for Caution in Rate Hikes, September Summary Reveals – Reuters

By Leika Kihara

TOKYO – Bank of Japan policymakers expressed the need for caution regarding potential near-term interest rate hikes, with several members raising concerns about volatile financial markets and the economic outlook in the U.S., according to a summary of their September meeting released on Tuesday.

Even among those favoring future rate increases, there was a call for patience, indicating a shift towards a more dovish stance among the nine-member board that reduces the likelihood of a rate hike in October.

One member noted, “I remain convinced that if it’s confirmed there will be no major downward revision to our outlook, it’s desirable to raise rates without taking too much time.” However, this member emphasized that "rate hikes should not be an end in itself," stressing the need to wait for the appropriate timing to increase borrowing costs.

Given the current economic and market uncertainties, some members voiced that it would be undesirable for the BOJ to raise rates further at this time, as doing so might convey a shift toward a full-fledged monetary tightening cycle. Another member remarked, “Overseas economic uncertainties have heightened. We should scrutinize overseas and market developments closely for the time being,” suggesting that rate hikes can be postponed until such uncertainties are resolved.

During the September meeting, the BOJ maintained short-term rates at 0.25%, with the governor indicating that the bank could afford to take time to assess the impacts of global economic uncertainties, signaling no immediate rush to raise borrowing costs further.

The BOJ is scheduled for its next rate review on October 30-31, during which it will also release fresh quarterly growth and price forecasts vital for the central bank’s long-term policy direction.

One member highlighted, “In conducting monetary policy, it’s necessary to give due consideration to downside risks to Japan’s economy and monitor data carefully,” reflecting a shift in the BOJ’s focus from the risk of inflation overshooting to supporting a fragile economic recovery.

The BOJ ended negative rates in March and raised short-term borrowing costs to 0.25% in July, believing Japan was making progress toward achieving its 2% inflation target sustainably.

The BOJ’s July rate hike and Governor Kazuo Ueda’s hawkish remarks, alongside weak labor market data from the U.S., triggered a significant increase in the yen and a downturn in the stock market in early August. Since then, BOJ policymakers have emphasized the importance of considering the economic fallout from such market volatility.

The September policy meeting occurred shortly after the U.S. Federal Reserve made a substantial reduction in borrowing costs. In addition, the recent departure of Prime Minister Fumio Kishida, who appointed Ueda and supported the BOJ’s policy normalization, adds uncertainty regarding the central bank’s plans to increase interest rates to levels considered neutral for the economy, which one board member indicated should be at least 1%.

During the September meeting, a member commented on the yen’s sharp recovery from previous lows, suggesting it could adversely affect exports and dissuade manufacturers from raising wages.

Concerns were also raised about potential negative impacts on the yen’s exchange rates and corporate profits in Japan due to increasing uncertainties regarding both the U.S. economy and the Fed’s pace of rate cuts. Another member remarked, “As for the next rate hike, I’m focusing on developments in consumer inflation, momentum toward next year’s wage talks, and U.S. economic trends.”