July 31 (Reuters) – The Bank of Japan kept its interest rates steady on Friday, while reiterating its willingness to raise borrowing costs further if inflation risks increase.
At the end of its two-day policy meeting, the central bank voted 8-1 to keep its short-term policy rate at 1%. Board member Hajime Takata dissented, arguing for a 25-basis-point increase to 1.25%.
COMMENTS KAZUTAKA MAEDA, SENIOR ECONOMIST, MEIJI YASUDA RESEARCH INSTITUTE, TOKYO:
“The BOJ’s slight upward revision to its economic outlook provides additional justification and support for the rate-hike process. If currency intervention was timed to coincide with the policy meeting, it could be interpreted as a message that the government does not want the central bank to raise interest rates on the grounds of yen depreciation.
“That said, intervention only buys time. If the underlying weak yen trend remains unchanged, discussion will naturally return to further rate hikes. With that in mind, I expect the pace of rate hikes, which until now has been roughly once every six months, to accelerate somewhat going forward.”
NAKA MATSUZAWA, CHIEF MACRO STRATEGIST, NOMURA SECURITIES, TOYKO:
“I think only one dissent vote suggests that there’s not yet widespread views among the BOJ officials that (a hike) is necessary. So that will take off some of the effect of the currency intervention probably.
“It was a kind of golden opportunity for Japanese authorities, if they really wanted to change the course of the yen, now that the Fed looks fragile and hike expectations taper out at the fed. But bottom line, I guess Takaichi herself is not ready for it.” MARCEL THIELIANT, HEAD, ASIA-PACIFIC, CAPITAL ECONOMICS, SINGAPORE:
“The BOJ’s outlook report was hawkish and we’re sticking to our non-consensus view that the central bank will lift interest rates to 2% by the end of next year.
“The decision itself wasn’t unanimous because arch hawk Hajime Takata once again dissented in favour of a rate hike just as he did in April. That’s remarkable given that the bank just raised rates at its June meeting.
“In contrast to what we anticipated, the bank judged that risks to activity were ‘generally balanced’ despite the renewed increase in crude oil prices in recent weeks. And strikingly, the board barely revised their forecasts for inflation excluding fresh food and energy at all.
“The central bank still believes that risks to inflation are tilted to the upside. Most importantly, for the first time ever it now believes that ‘underlying inflation’ could rise above its 2% target, which signals a more severe degree of concern.” MASATO KOIKE, SENIOR ECONOMIST, SOMPO INSTITUTE PLUS, TOKYO:
“I got the impression that the statement was somewhat hawkish. In particular, the section on prices and the 2% inflation target stood out.
“The wording suggested that inflation is ‘approaching 2%’, and it also emphasized the importance of confirming whether inflation will become firmly anchored at 2%. Given that inflation appears to be getting closer to that 2% level, I think this represents a step forward.
“Since interest rates are already at historically high levels, I think there is still a need to wait and assess conditions for a certain period. However, based on today’s outcome, my impression is that the likelihood of an October hike has increased relative to December.” HIROFUMI SUZUKI, CHIEF FX STRATEGIST, SMBC, TOKYO:
“The decision to keep rates unchanged was in line with expectations, given that the BOJ had only just raised rates in June. However, board member Takata’s dissent in favour of another consecutive rate hike was somewhat unexpected.
“The BOJ generally revised up its economic growth outlook, while lowering its near-term inflation forecasts. These revisions are unlikely to undermine the expected path of future rate hikes.
“The BOJ is expected to continue raising rates at a gradual pace. However, with volatility in USD/JPY increasing, we think that we are entering a phase in which further yen depreciation could prompt markets to price in an earlier rate hike.”
(Reporting by Reuters Asia markets team; Editing by Sherry Jacob-Phillips)
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