TOKYO, Jan 14 (Reuters) – Bank of Japan policymakers are debating how soon they can start telegraphing an eventual interest rate hike, which could come even before inflation hits the bank’s 2% target, sources say, emboldened by broadening price rises and a more hawkish Federal Reserve.
While an actual rate hike is hardly imminent and the BOJ is on course to maintain ultra-loose policy at least for the rest of this year, financial markets may be under-estimating its readiness to gradually phase out its once-radical stimulus programme.
Notably, the BOJ’s carefully worded promises to keep monetary policy accommodative apply only to steadily pumping cash into markets – not to keeping rates at current low levels.
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“The BOJ never committed to keep rates on hold until inflation exceeds 2%,” a source familiar with the BOJ’s thinking said, a view echoed by two more sources.
“That means theoretically, it can raise rates before inflation is sustainably above the target.”
After nine years of aggressive monetary easing, the BOJ appears to be finally getting what it wanted. Inflation is creeping up toward its elusive goal and already shifting public perceptions that deflation will persist.
With the rise driven by higher raw material prices, rather than a hoped-for uptick in domestic demand, the BOJ’s near-term priority is to avoid a transitory blip in inflation from fueling market speculation of an early policy tightening.
Many BOJ officials don’t expect conditions to fall into place to justify a rate hike this year, given uncertainty on whether consumption will strengthen enough to allow firms to keep raising prices.
That may mean an actual rate hike may not come until well into 2023 and under a new governor who would succeed incumbent Haruhiko Kuroda, whose term ends in April next year.
But the Fed’s steady rate hike plan, a weak yen and growing public discontent over rising living costs are prodding the BOJ to be bolder in brainstorming a future exit plan, sources said.
“For the first time in a while, there’s not just downside but upside risks to the price outlook,” a second source said.
“The BOJ needs to pay close attention to what other central banks are doing,” a third source said, pointing to an increasing number of overseas counterparts eyeing rate hikes.
The central bank’s nine-member board is split between those who see scope to scale back stimulus, and those cautious of taking any step that could be interpreted as policy tightening, the sources said.
JOINING THE LINE FOR THE EXITS
The BOJ has already been phasing out quantitative easing (QE) by steadily tapering asset purchases. The…
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