TOKYO : The Bank of Japan’s meeting last week passed with no surprises, but for a careful BOJ watcher its message on the need to remain vigilant on food-driven inflationary pressures had an important takeaway: Rates could be raised sooner than expected.
As with many other central banks, the Trump administration’s broad tariffs against its trading partners have raised uncertainty for Japan’s monetary path as policymakers tread cautiously while they try to assess the economic implications of the rapid-fire bursts of U.S. duties.
All the same, growing signs of sticky food inflation, which adds to prospects of sustained wage increases, will likely keep the BOJ on course to raise rates at a steady pace in contrast with more rate cuts signalled by its U.S. and European counterparts.
Highlighting a problem that many major central banks are grappling with, BOJ Governor Kazuo Ueda warned of heightened uncertainty over how higher U.S. tariffs could affect the global economy, in explaining the bank’s decision to keep interest rates steady on Wednesday.
But the BOJ can incorporate to some extent the potential impact from Trump tariffs in its quarterly outlook report due at its next meeting on April 30-May 1, Ueda said, signalling a rate hike at the meeting cannot be completely ruled out even though current consensus is for a tightening to occur around the third quarter.
He also balanced concerns over global uncertainty with hawkish signals on the domestic price outlook, suggesting the BOJ was unwavering in its resolve to keep hiking short-term rates from the current 0.5 per cent.
Contrary to past remarks playing down food inflation as temporary, Ueda said stubbornly high food costs could have a lasting impact on underlying inflation and public perceptions on future price moves – both factors seen by the BOJ as key to the pace and timing of further rate hikes.
“Rising food costs are usually seen as supply shocks that can be overlooked. However, the prolonged increase in rice prices means the risk of these rises affecting inflation expectations and public sentiment is not negligible. As such, we will need to watch such risks carefully,” Ueda said.
Ueda also said some on the board “mentioned the need to remain vigilant to upside price risks,” a rare revelation of actual deliberations at the meeting that highlighted growing worries within the BOJ on domestic inflationary risks.
“If upside risks to underlying inflation heighten, that will be a reason to accelerate our process of adjusting the degree of monetary support,” he added, a clear signal the BOJ won’t shy away from an earlier-than-expected rate hike to anchor inflation expectations.
Food prices have been rising in Japan since global commodity costs surged after the Ukraine war, and remain elevated due to various factors including rising import costs from a weak yen. The soaring price of rice, triggered by last year’s bad crop from a hot summer, has added to the inflationary pressure.
‘LIVE’ MAY MEETING?
Ueda’s remarks underscore the growing attention the BOJ is putting on stubbornly high food prices that have kept inflation above its target for nearly three years.
Core inflation hit 3.0 per cent in February as food prices rose 5.6 per cent from year-before levels, accelerating the pace of increase for the seventh straight month. Japan’s staple rice saw prices soar 81.4 per cent, the fastest pace of increase in nearly half a century.
“The BOJ doesn’t have control over supply shocks like rising food prices, but what’s important is how long this will last,” said a source familiar with the bank’s thinking.
“If it persists, it could materially change the way people see future price moves and justify rate hikes,” another source said on rising food costs. Both sources spoke on condition of anonymity as they were not authorised to speak publicly.
To be sure, the BOJ is in no rush to raise rates with higher wages yet to cause a spike in services inflation, which stood at 1.3 per cent in February. Long-term inflation expectations, which the central bank focuses on in setting policy, have also shown no sharp deviation from its 2 per cent inflation target.
Still, the fact Ueda flagged the risk of an inflation overshoot is notable as a sign uncertainty over Trump’s policies alone won’t hold back the BOJ from raising rates, analysts say.
“The BOJ probably didn’t want market bets of a near-term action to recede too much,” said Naomi Muguruma, chief bond strategist at Mitsubishi UFJ Morgan Stanley Securities.
“True, there are headwinds blowing from Trump. But the BOJ appears keen to hike once tailwinds start to blow. It wants to ensure any early rate hike won’t turn into a market surprise.”
For now, the dominant market view is for the BOJ to hold fire at the April 30-May 1 meeting to spend more time gauging the fallout from Trump’s tariff policies.
A Reuters poll showed many analysts expect the BOJ’s next rate hike to come in the third quarter, most likely in July.
But some BOJ watchers see recent wage and price data as good enough reason for the central bank to act as soon as May 1, including former BOJ official Nobuyasu Atago.
“I don’t think the BOJ has made up its mind yet but to me, Ueda’s remarks sounded as if May could be a live meeting,” said Atago, who is currently chief economist at Rakuten Securities Economic Research Institute.
“When prices of goods people buy frequently keep rising for so long, central banks need to act. I’m sure the BOJ is very mindful of the risk of leaving food inflation unattended.”
