TOKYO :Bank of Japan board members discussed how to use estimates on the economy’s neutral interest rate to determine further hikes in borrowing costs, with one saying the BOJ’s policy rate was still far from that level, minutes of their December meeting showed.
Another member questioned whether it was appropriate to use estimates based on data from Japan’s prolonged period of deflation, in determining the timing of future interest rate hikes, according to the minutes released on Wednesday.
“If the policy rate approached the neutral rate, the BOJ would need to slow the pace of rate hikes to carefully examine how the economy and prices would respond,” the minutes quoted one member as saying.
“At this point, however, the policy rate was still far from neutral. It’s therefore desirable to raise rates in a timely manner,” the member was quoted as saying, suggesting the BOJ had scope to push up borrowing costs several more times in the current cycle.
The remarks highlight intensifying debate within the BOJ on how far the central bank should eventually push up borrowing costs, as inflation has topped its 2 per cent target for nearly three years and wage hikes broaden due to labour shortages.
At the December meeting, the nine-member board also agreed to have BOJ staff overseeing Japan’s financial system attend all of the eight policy-setting meetings held each year.
“Having them participate would be beneficial in monitoring the effects of rising interest rates on Japan’s financial system,” one member was quoted as saying.
At present, the staff only attend the four meetings that produce quarterly growth and inflation forecasts.
The BOJ kept interest rates steady at the Dec. 18-19 meeting on the view it needed more time to scrutinise wage developments and U.S. economic policy. It raised rates to 0.5 per cent from 0.25 per cent in a subsequent meeting in January.
Governor Kazuo Ueda told reporters after the January meeting that the central bank will continue to raise rates, though he offered few clues on the pace and timing of further hikes.
Markets are paying close attention to the BOJ’s neutral rate estimate as it would show how far the bank could eventually push up borrowing costs.
Its staff has produced estimates showing Japan’s nominal neutral rate to be in a range of 1 per cent-2.5 per cent. Many analysts see the neutral rate as somewhere around 1 per cent. Ueda has said it was hard to estimate Japan’s neutral rate on a real-time basis.
At the December meeting, the nine-member board voted down hawkish member Naoki Tamura’s proposal to hike rates. But many members saw the economy moving in line with the BOJ’s forecast and said firms will likely keep boosting pay, the minutes showed.
While many saw uncertainty on U.S. economic policy under Donald Trump’s second presidency as reason to stand pat, one member said it was appropriate to avoid hiking rates in December when market volatility tended to heighten, the minutes showed.
A separate opinion showed one member cautioning against hiking when there was “huge uncertainty” on the domestic political debate over tax and fiscal policy.
Back in December, Prime Minister Shigeru Ishiba’s minority coalition was under pressure from opposition parties to expand tax breaks to households. The administration also needs opposition support to pass through next fiscal year’s budget.
