A hawkish member of the Bank of Japan indicated that conditions for the next interest rate hike could mature in the spring if wage growth aligns with targets. This statement is likely to fuel further market speculation about earlier action.
Naoki Tamura, one of the most hawkish members of the policy board, stated during a speech at a business conference in Yokohama on Friday, "If it can be confirmed with a high degree of certainty that this year's wage growth will meet the target for the third consecutive year, then it may be possible to judge as early as this spring that the 2% price stability target has been achieved."
While it remains unclear whether other members of the Bank of Japan's board share Tamura's view, his remarks suggest that Governor Kazuo Ueda could face increasing opposition if he decides to maintain the status quo at policy meetings before April. Tamura's comments will also intensify market speculation that the next rate hike could occur in April, or potentially as early as next month.
Even before Sanae Takaichi's overwhelming election victory last Sunday, expectations of a win for the pro-stimulus leader had already sparked speculation that the yen would remain weak and continue to generate upward pressure on inflation. Since the Bank of Japan's policy meeting in January, observers from Barclays and SMBC Nikko Securities have adjusted their rate hike expectations to April.
According to data from overnight swap trading, traders now see about a 75% chance that the Bank of Japan will raise the benchmark interest rate before April, compared to only around 40% a month ago.
Tamura defined price stability as a state where economic entities, including households and businesses, can make consumption and investment decisions without factoring in price level fluctuations. This aligns broadly with the general consensus among central bankers, and former Federal Reserve Chairman Alan Greenspan has made similar remarks on multiple occasions.
Tamura added, "However, many households are struggling with rising living costs, and many companies are grappling with increased input prices. Personally, I do not believe we can claim that Japan has achieved the defined state of price stability."
Last year, Japan's core inflation indicator accelerated to 3.1%, marking the fourth consecutive year it has exceeded the Bank of Japan's target—the longest such streak since 1992. Sanae Takaichi's significant election victory in the post-war era was partly based on her promise to alleviate the pain of the cost-of-living crisis.
Ensuring that the wage growth trend remains robust is a core shared concern for the Japanese Prime Minister and the Bank of Japan. The central bank views wage growth as a crucial component for generating a stable inflation cycle, which in turn supports consumption and economic growth. Japan's largest trade union federation typically announces the results of its annual wage negotiations in mid-March—a key data point that has previously prompted central bank action.
Tamura, a former executive at Sumitomo Mitsui Financial Group, is known, along with Hajime Takata, for frequently calling for an acceleration of policy normalization. At the January meeting, Takata voted in favor of a rate hike against the decision to maintain the status quo, adding a hawkish tone to the proceedings.
In Tamura's view, the current interest rate of 0.75% has a limited impact on the economy, indicating that the central bank still has a long way to go before reaching a level that neither restricts nor stimulates economic activity.
Tamura stated, "There remains a considerable distance to the neutral interest rate level. In other words, even if the central bank raises the policy rate, financial conditions will remain accommodative."
The Bank of Japan is scheduled to announce its next policy decision on March 19, the same day Sanae Takaichi plans to meet with Donald Trump in the United States.
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