BOJ Is said to see potential rate hike environment this year

Japan Times

20 hours ago

Bank of Japan officials see the possibility of mulling another interest rate hike this year after the U.S. and Japan struck a trade deal this week, according to people familiar with the matter.
The officials view the deal as reducing a key source of uncertainty for Japan's economy and businesses, allowing the central bank to focus on monitoring the tariffs' actual impact in incoming economic data, the people said.
With more clarity over trade, the central bank may be able to make a decision on policy at an earlier stage after parsing data and information from companies.
The yen strengthened to as much as ¥146.82 against the dollar, and Japanese government bond futures fell shortly after the report was published.
Provided there's no change to the pact that sets most tariffs at 15%, the officials expect the central bank to have enough data at least by the end of the year to be able to consider whether a rate hike would be appropriate, the people said. The BOJ will also be monitoring Japan's price trend and the progress of other nations' trade talks as it mulls that possibility, they said.
Any move to raise rates this year would align with growing speculation in markets. Swaps traders are pricing in roughly 80% odds of a hike by year-end, up from around 60% before the trade deal was announced.
In a Bloomberg survey conducted just before the trade deal report, January remained the most popular pick for when the next rate hike may come, with 36% of respondents choosing that month. October was the next favorite, with 32% opting for it.
The latest views from the officials suggest there's no immediate rush to increase the benchmark rate ahead of a policy meeting ending on July 31, as they wait to assess the likely impact from tariffs. They also indicate that the trade agreement opens the door to mulling rate hikes after the BOJ previously indicated a temporary pause for the hiking cycle due to uncertainty over the negotiations.
Japan's deal with the U.S. sets car and across-the-board tariffs at 15%, lower than the implemented 25% duty on cars and threatened broad tax at the same rate.
The BOJ officials note that the trade outcome was roughly within the range of the BOJ's expectations and it's probably unnecessary to make a drastic change in the central bank's overall economic outlook, the people said.
The officials will also be checking whether Japan's underlying price trend is rising toward the central bank's 2% target, after it's been running stronger than expected lately largely due to food inflation.
The BOJ board is likely to consider raising its inflation outlook in its quarterly economic outlook report at next week's policy meeting, people familiar with the matter told Bloomberg earlier this month. japan's pace of price growth has been among the highest for Group of Seven countries, and has stayed at or above the BOJ's 2% target for more than three years.
Persistent inflation was a key focus of the upper house election on Sunday, and contributed to a historic defeat for Prime Minister Shigeru Ishiba's ruling coalition. With speculation swirling over how long Ishiba may last in his role, additional political instability could be a source of concern for the BOJ as it mulls the timing of its next rate hike.
The central bank has repeatedly communicated its stance that it will hike rates if its economic outlook is realized, hinting that rate increases will happen as long as the economy and inflation develop in line with their expectations, even in the absence of a positive surprise.
Speaking shortly after the trade pact announcement this week, Deputy Gov. Shinichi Uchida said there's a higher likelihood of the BOJ's economic outlook being realized.