The Bank of Japan is set to debate whether to raise interest rates next week, with Deputy Governor Ryozo Himino stating that it would be “not normal” for real interest rates to remain negative once Japan has overcome shocks and factors that caused deflation. Himino also expressed optimism about the U.S. economy, stating that it is likely to remain strong for the time being, and that the “broad direction” of U.S. economic policy will likely become clear in President-elect Donald Trump’s inaugural address.
Himino’s comments come ahead of the BOJ’s two-day policy meeting, which is expected to conclude on January 24. The bank will also issue fresh quarterly growth and price forecasts that will serve as the basis for setting monetary policy.
Himino’s views on wages and the U.S. policy outlook have been closely watched by markets, as Governor Kazuo Ueda cited uncertainty over the domestic wage outlook and Trump’s policies as reasons to hold off raising rates last month. The remarks by Himino, coupled with rising U.S. Treasury yields, pushed up the benchmark 10-year Japanese government bond yield to a 14-year high of 1.250%, with some analysts expecting the bank to raise short-term rates from the current 0.25%.
Himino stated that the board will discuss whether to raise interest rates next week and reach a decision, based on the economic and price projections laid out in the bank’s quarterly outlook report. He also noted that there are both upside and downside risks to Japan’s economic and price outlook, and that month-on-month rises in import costs have been “quite high” due partly to the weak yen.
The BOJ ended negative interest rates in March and raised its short-term rate target to 0.25% in July, and Governor Ueda has signalled readiness to raise rates further if broadening wage hikes underpin consumption and allow companies to keep hiking prices not just for goods but services.