BOJ Discusses Caution in Raising Interest Rates: October Minutes Reveal

By Leika Kihara

TOKYO - Policymakers at the Bank of Japan (BOJ) reached a consensus in October to continue raising interest rates if the economy aligns with their forecasts. However, some members emphasized the necessity for caution, mainly due to uncertainties surrounding economic policies of the United States, as reflected in the minutes of their recent meeting.

This discussion highlights that external economic risks, especially those associated with the new U.S. administration's policies, will significantly influence the timing of any rate hikes by the BOJ.

During the meeting held on October 30-31, before Donald Trump's election victory on November 5, BOJ board members expressed their concerns about potential market volatility and major shifts in U.S. policy, which could pose risks to Japan's economic outlook. One member stated, "We can spend time scrutinizing U.S. developments, especially following the U.S. presidential election, as we had anticipated raising rates at a moderate pace."

Despite the worries regarding external factors, the board remained optimistic about domestic economic conditions. Many members voiced that rising wages would bolster consumption and help Japan achieve the BOJ's target of 2% inflation sustainably.

Several members noted that "wage growth is likely to remain elevated in next year's spring wage negotiations" between companies and labor unions.

At the October meeting, the BOJ decided to maintain interest rates at 0.25% but projected that inflation would align with the 2% target in the upcoming years, indicating readiness to increase borrowing costs soon.

While members confirmed the intention to raise rates if economic and inflation forecasts were met, several also advocated for careful monitoring of various risks. One member remarked, "We must guide monetary policy cautiously given heightening uncertainty both domestically and internationally," explaining the decision to keep rates steady in October.

Another opinion expressed the need for the BOJ to exercise caution regarding the timing of rate hikes, considering that Japan's policy rate has not exceeded 0.5% for the last three decades.

The BOJ opted to hold rates steady at a later meeting in December, awaiting additional data on wage trends and clarity on U.S. President-elect Donald Trump's policies.

The BOJ had previously ended negative interest rates in March and raised its short-term policy target to 0.25% in July. They have signaled a willingness to raise rates again if both wages and prices perform as projected.

A recent Reuters poll indicated that all respondents expect the BOJ to increase interest rates to 0.50% by the end of March, although opinions differ on whether this action will occur in December, January, or March.

BOJ, interest, rates