Some in Bank of Japan saw scope to hike rates if trade friction eases, June minutes show
At the June meeting, many members said the central bank must keep interest rates steady due to downside risks to the economy from US tariffs, the minutes showed on Tuesday.
But they also saw inflation overshooting expectations, with some warning that recent rises in food costs could affect public perceptions on future inflation, the minutes showed.
'Given high uncertainties, the BOJ would likely pause rate hikes for the time being. But it also must respond flexibly and nimbly, and return to a rate-hike phase depending on US policy developments,' one member was quoted as saying.
Another member said the BOJ might need to raise rates decisively even when uncertainty remained high, given the fact inflation remained higher than expected.
'As wages had been solid and prices had been slightly higher than expected, the Bank would likely shift away from the current wait-and-see approach and consider resuming rate hikes, if trade friction de-escalates,' a few members were quoted as saying.
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The remarks highlight the board's growing attention to upside inflation risks, which led the BOJ to signal its readiness to keep raising rates even as US tariffs clouded the economic outlook.
At the June 16-17 meeting, the BOJ kept interest rates steady at 0.5 per cent and decided to decelerate the pace of its balance sheet drawdown next year, signalling its preference to move cautiously in removing remnants of its massive stimulus.
The impact of US tariffs was the focus of debate at the June meeting, which was held before Japan clinched a trade deal with the US in July and won cuts to hefty tariffs.
While one member cautioned that it would take some time to gauge the impact of US tariffs on corporate earnings, some said the hit to growth from the higher levy could be smaller than initially expected, the minutes of the June meeting showed.
Japanese companies appear to have shed their long-held view that wages and prices must be kept low, one member said, adding the focus would be whether firms would keep hiking pay even if their profits are squeezed by US tariffs.
'I'm paying attention to the fact we're seeing home-made inflation emerge, as seen in rising wages driven by labour shortages,' another member was quoted as saying.
In deciding on next year's bond taper plan, some in the board also saw the need to scrutinise the desirable size of the BOJ's balance sheet in the long run, the minutes showed.
While one member said it was desirable for the BOJ to eventually reduce monthly bond buying to zero, another said a cut to around 1 trillion yen (S$8.8 billion) would suffice, the minutes said.
The central bank is currently tapering bond buying so that monthly purchases slow to around 3 trillion yen by March 2026.
In an extended taper plan decided in June, the BOJ expects monthly purchases fall to around 2 trillion yen by March 2027.
The BOJ kept interest rates steady at a subsequent meeting on July 30-31. But it revised up its inflation forecasts and offered a less gloomy outlook on the economy, keeping alive the possibility of a resumption in rate hikes this year. REUTERS
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