By Leika Kihara
TOKYO (Reuters) – Prospects for sustained wage hikes in Japan and rising import costs due to a weak yen have increased the central bank’s focus on growing inflationary pressures that could lead to an upward revision of its price forecasts this month, sources said.
Even if the Bank of Japan were to raise its inflation forecast, this revision alone will not lead to a rise in interest rates if it is driven by temporary factors such as the rise in the price of rice and the rise in import costs, three sources familiar with the matter said. the bank’s thinking.
The BOJ could raise rates this month if the board is confident that sustained, broad-based wage hikes will occur and keep inflation sustainably at its 2% target, they said.
“Risks to inflation are tilted to the upside, partly because of the further fall in the yen,” one of the sources said, a view echoed by another source.
“Wage dynamics also look strong,” a third source said, adding that the board could discuss revising upward its inflation forecast for the fiscal year starting in April.
The BOJ will likely debate whether to raise interest rates from the current level of 0.25% at its policy meeting on January 23-24. It will also publish new quarterly growth and price forecasts which will serve as a basis for developing monetary policy.
Under current forecasts, the board expects core consumer inflation to reach 1.9% for fiscal years 2025 and 2026. Although the board has not yet discussed the details of its forecast, Recent data and surveys have highlighted increasing inflationary pressures.
The yen is currently hovering at 158 to the dollar, down from 140 in September and close to levels reached when the BOJ raised rates in July last year.
Core inflation accelerated in November to 2.7% as the weak yen pushed up import costs, reinforcing stubbornly high rice prices.
Rising wages add to inflationary pressures, supporting the BoJ’s argument that Japan is on track to sustainably meet its 2% inflation target, a precondition for further rate hikes.
Wage hikes extend to companies of all sizes and sectors, the BOJ said in a quarterly report on Thursday, signaling that conditions for a short-term rate hike continued to build.
“The need to raise wages is more widely shared by small businesses,” Kazushige Kamiyama, director of the BOJ’s Osaka branch, said at a press briefing on Thursday. “We can expect strong wage gains this year.”
As such optimism increases the chances of a rate hike at the BoJ’s January meeting, Governor Kazuo Ueda cited uncertainty over US President-elect Donald Trump’s policies as a reason to be more cautious. caution in increasing borrowing costs.
If comments and policies announced after Trump’s Jan. 20 inauguration trigger volatile moves in markets, the BOJ could delay raising rates again, some analysts say.
Markets are focusing on BoJ Deputy Governor Ryozo Himino’s speech and press conference on Tuesday for further guidance on whether the bank will raise rates this month.
