TOKYO : Inflationary pressure from wage gains and prolonged rises in food costs could prompt Bank of Japan board members to discuss another interest rate hike as soon as in May, said three sources familiar with its thinking.
Whether the BOJ actually hikes rates at the April 30-May 1 meeting, or holds until later this year, will depend not just on the price outlook but how U.S. President Donald Trump’s policies affect financial markets, the sources said on condition of anonymity as they were not authorised to speak publicly.
The BOJ is widely expected to keep policy steady at the March 18-19 meeting, having just raised interest rates to 0.5 per cent from 0.25 per cent at their previous January meeting, with markets largely tipping the next hike in the third quarter.
“It’s not as if we would hike rates at every meeting,” BOJ Deputy Governor Shinichi Uchida told reporters on Wednesday, essentially ruling out a hike at this month’s meeting.
However, the chance of another rate hike occurring at the May meeting will increase particularly as the BOJ will also issue quarterly growth and inflation forecasts extending to fiscal 2027 for the first time, the sources say.
The yen rose and Japan’s 10-year government bond yield hit a nearly 16-year high on Thursday due in part to expectations of a near-term BOJ rate hike.
Many policymakers see risks to the price outlook skewed to the upside as firms continue to pass on rising raw material and labour costs, pushing headline inflation to a two-year high of 4 per cent in January – double the bank’s price target.
While central banks typically look past rises in volatile fresh food prices, the BOJ is putting more attention to the risk that sticky food inflation – including a relentless spike in the price of rice – may heighten households’ inflation expectations, the sources said.
“When looking at underlying inflation, what’s most important is wages. But we must also scrutinise how prices of goods people frequently buy affect inflation expectations,” Uchida said.
There are also growing signs many firms will keep offering bumper pay hikes to cope with intensifying labour shortages, meeting a key prerequisite for further rate hikes.
Japan’s largest labour union group Rengo said on Thursday its member unions are seeking an average wage hike of 6.09 per cent for this year, outpacing last year’s demand, which resulted in the highest wage increase in three decades.
Many big firms are expected to announce pay offers on March 12, which will serve as a benchmark for nationwide wage trends. The final reading is typically due around July.
The mounting inflationary pressures could lead to an upgrade in the BOJ’s price forecasts in May and prompt discussions over the feasibility of a rate hike, the sources said. Under current projections made in January, the board expects core consumer inflation to hit 2.4 per cent in fiscal 2025 and 2.0 per cent in 2026.
TRUMP COMPLICATES RATE PATH
The timing of the BOJ’s next rate hike will depend largely on a flurry of data coming out ahead of the May rate review.
The BOJ’s quarterly “tankan” business sentiment survey, which includes findings on corporate inflation expectations, is due on April 1, followed by another quarterly survey on households’ inflation expectations set for release on April 11.
The April Tokyo consumer inflation data, which is closely watched as a leading indicator of nationwide trends, is due on April 25 and will offer clues on whether firms are hiking services prices at the April start of Japan’s new fiscal year.
The BOJ’s regional branch managers will produce a quarterly report in mid-April that will include updated findings on the extent to wage and price gains are spreading nationwide.
If such data heighten conviction among the board members that inflationary pressure is building, a rate hike in May will become a real possibility, the sources said.
A key complication is the risk of Trump’s tariff policies upending financial markets and hurting corporate spending appetite by stoking fears of a severe global slowdown.
Speaking after a G20 finance leaders’ gathering in South Africa, BOJ Governor Kazuo Ueda last week warned of “very strong” uncertainty on the global economic outlook. A global trade war and the uncertainty it causes will likely weigh on the BOJ’s growth projections for Japan’s economy, the sources said.
“In the end, it will be a judgement call between rising inflation and downside risks from external factors,” one of the sources said.
The BOJ raised rates in January on the view that Japan was making progress towards durably achieving its 2 per cent inflation target. It has signalled readiness to keep raising rates if economic and price developments move in line with its projections.
Core consumer inflation hit 3.2 per cent in January, its fastest pace in 19 months and exceeding the BOJ’s target for nearly three years.
