Bank of Japan deputy governor Uchida vows to keep raising interest rates

SHIZUOKA - Bank of Japan (BOJ) deputy governor Shinichi Uchida said the central bank can proceed with interest rate hikes at a pace in line with market expectations, keeping alive views that there is a chance of a near-term increase in borrowing costs.

But he offered few clues on when and how far the central bank could raise rates, stressing the difficulty of estimating where Japan’s neutral rate of interest – the level that neither cools nor overheats the economy – could be.

“In practice, (the neutral rate level) is something we will know while examining how the economy and prices respond to our interest rate hikes,” Mr Uchida said in a speech to business leaders in Shizuoka on March 5.

“If it’s at a pace in line with expectations, it will be possible for us to proceed with rate hikes while examining how the economy responds,” he said.

Markets are roughly pricing in the chance of a hike in the BOJ’s policy rate to 0.75 per cent from the current 0.5 per cent around July, followed by another increase to 1 per cent early 2026, according to a chart attached to Mr Uchida’s speech text posted on the BOJ’s website.

Mr Uchida warned of the need for vigilance due to strong uncertainty over the global economic outlook due in part to US President Donald Trump’s policies and geopolitical tensions.

But he was upbeat on Japan’s economy, saying consumption will likely be underpinned by solid pay increases expected in 2025’s wage talks between companies and unions.

With underlying inflation accelerating gradually and wages rising, raising interest rates “will lead to stability in economic activity and prices in the long run”, he said.

“If our economic and price projections outlined in our latest outlook report in January are realised, we will continue to raise the policy rate,” Mr Uchida said.

The remarks suggest the BOJ’s rate-hike resolve has been undeterred so far by Mr Trump’s 25 per cent tariffs on goods from Canada and Mexico, a doubling of duties on Chinese goods to 20 per cent, and threats of levies against other countries that have stoked fears of a global economic slowdown.

There was muted market reaction to Mr Uchida’s comments, which were closely watched due to his track record of dropping strong hints on the outlook for monetary policy.

“They weren’t that hawkish,” Mr Tsuyoshi Ueno, an economist at NLI Research Institute, said of Mr Uchida’s remarks. “They are in line with the BOJ’s official view,” he said.

On the price outlook, Mr Uchida said the BOJ expects annual consumer inflation to slow towards its 2 per cent target as cost-push pressures wane, while underlying inflation will accelerate towards 2 per cent accompanied by wage gains.

“As a result, both actual inflation and underlying inflation are expected to be at around 2 per cent” some time during the period from the second half of fiscal 2025 to fiscal 2026, he said.

By then, the BOJ’s policy rate would have approached levels deemed neutral to the economy, which its staff estimates to be in a range of 1 per cent to 2.5 per cent on a nominal basis when assuming inflation moves around 2 per cent, Mr Uchida said.

But he said the estimates are subject to estimation error and set in too wide a range to be used for actual conduct of monetary policy, calling instead to set the rate hike timing by looking closely at economic and price developments.

The BOJ ended a decade-long massive stimulus in 2024 and raised its short-term policy rate to 0.5 per cent from 0.25 per cent in January on the view that Japan was on the cusp of sustainably achieving its 2 per cent inflation target.

BOJ governor Kazuo Ueda has said the central bank will keep raising rates if Japan continues to make progress in durably achieving 2 per cent inflation backed by robust wage growth.

Japan’s solid October to December 2024 gross domestic product data, coupled with recent strong inflation, have pushed up the yen and bond yields by cementing expectations of a near-term rate hike.

A majority of economists polled by Reuters expect the BOJ to hike rates once more in 2025, most likely during the third quarter, to 0.75 per cent.

Japan’s economy expanded an annualised 2.8 per cent in the final quarter of 2024 on solid corporate and household spending.

Core consumer inflation hit 3.2 per cent in January, its fastest pace in 19 months and exceeding the BOJ’s 2 per cent target for nearly three years, as companies continued to pass on rising raw material and labour costs. REUTERS