BOJ Debates Caution in Rate Increases, October Meeting Minutes Reveal

By Leika Kihara

TOKYO (Reuters) - Policymakers at the Bank of Japan (BOJ) discussed the importance of exercising caution regarding interest rate hikes in their October meeting. Although they agreed that they could raise rates if the economy aligns with their forecasts, concerns about uncertainty in U.S. economic policy were frequently mentioned.

The discussions indicate that external economic risks, especially those associated with the new U.S. administration, will significantly influence the timing of any rate increase by the BOJ.

This October meeting occurred before Donald Trump was elected president on November 5. Nevertheless, BOJ members highlighted the potential for increased market volatility and large shifts in U.S. policy as significant risks to the economic outlook.

One board member noted, "We are preparing to closely examine U.S. developments, particularly those following the presidential election, since we had already planned to raise rates at a slow pace." These concerns over international factors contrasted with their generally optimistic views on Japan's domestic economic conditions.

Many BOJ board members expressed the belief that rising wages would enhance consumer spending and help Japan reach its goal of a 2% inflation rate sustainably. A few members mentioned that wage growth is expected to remain strong during the upcoming spring wage negotiations between companies and unions.

During the October meeting, the BOJ opted to maintain interest rates at 0.25% but anticipated inflation to hover around the 2% target in the coming years. This recommendation pointed toward a likely rate hike in the near future.

While the board confirmed they would raise rates if their economic projections were fulfilled, many members emphasized the necessity of exercising caution in light of various risks. As one member remarked, "Monetary policy must be guided cautiously given the growing uncertainty at home and abroad." Another member indicated that the central bank has not seen rates exceed 0.5% for the last three decades, which adds to the need for careful decision-making.

In a subsequent meeting in December, the BOJ decided to keep rates steady to wait for further data on whether wages would maintain their upward trends and to gain clearer insights into the policies of U.S. president-elect Donald Trump.

The BOJ had previously ended negative interest rates in March and raised its short-term policy target to 0.25% in July. The central bank has indicated its readiness to hike rates again if wage and price movements align with their expectations.

A Reuters poll conducted earlier this month revealed that all respondents foresee the BOJ increasing rates to 0.50% by the end of March. However, they are divided on the timing of when this increase will occur, whether in December, January, or March.

BOJ, InterestRates, Economy