BOJ eyes two more rate hikes in 2024

May 30, 2024 (MLN): The Bank of Japan may raise interest rates two more times this year, but it should refrain from responding directly to the weak yen, according to Takatoshi Ito, a professor at Columbia University, as Bloomberg reported.

“It’s possible that the rate goes up to 0.25% and then 0.5% this year,” Ito said in an interview Thursday with Bloomberg. “The BOJ is in a rate hike cycle of not too fast or too slow. If inflation is 2%, it’s natural for the rate to go up toward 2%.”

The remarks by Ito, whose name was floated as a potential candidate to take the helm of the BOJ last year, highlight the risk of the central bank taking a slightly more hawkish approach to policy than is currently priced in by most BOJ watchers.

Most expect the bank to conduct one more hike above the current range of 0% to 1% after the BOJ increased rates for the first time in 17 years in March.

While there is speculation the bank might move sooner rather than later due to the weak yen, Ito warned against such action, saying it could invite more trouble ahead.

“To bring the yen to, say, 135, how much would rates need to rise? One percentage point wouldn’t be enough,” Ito said. “It would probably work if the bank hiked by two percentage points, but that would have significant negative impacts on the domestic economy.”

The yen weakened to a four-week low of 157.71 to the dollar early Thursday, falling through a level that prompted the latest round of suspected interventions.

Ito, who worked under former BOJ chief Haruhiko Kuroda when he was a top currency official, said Japan’s likely interventions on April 29 and May 2 were successful, as they kept the currency from crashing through the key threshold of 160.

The BOJ concludes its next policy meeting on June 14. With most economists expecting the policy board to hold rates steady, a key focus will be on any tweaks to its bond purchasing operations, or any comments that telegraph quantitative tightening.

Some economists are of the view the bank is likely to decide to slow the pace of bond purchases this time from about ¥6 trillion ($38 billion) per month to ease pressure on the yen.

“I’m not sure if QT is something to declare. The BOJ won’t probably announce how much they will reduce it each month like the US did,” Ito said. “They are probably thinking to change the amount of the purchases flexibly without obsessing about the ¥6 trillion figure. They want to reduce it as long as yields don’t respond sharply.”

Japan’s 10-year bond yields continued to rise Thursday, hitting 1.1%, the highest level since July 2011. The BOJ is scheduled to release its bond buying plan for June on Friday.

Ito said a gradual rise in yields toward 1.5% won’t trigger a major problem for the economy overall.

The biggest challenge for BOJ’s normalization is inflation, Ito said.

Even now that Japan’s decades-old mindset of having no inflation or wage growth has shifted, the BOJ is still in the process of raising expectations to be consistent with its 2% price goal, with risks on the downside after prolonged deflation, said Ito, who was also a former adviser to the prime minister’s key economic panel.

“Service prices, such as rent, haven’t risen much,” Ito said. “I’m not fully confident the service prices that haven’t budged so far will actually rise.”

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