BOJ debated faster rate hikes in September, government pushed back

TOKYO: Some Bank of Japan policymakers saw the need to accelerate the pace of interest rate rises or bring them closer to the central bank's "goal" soon, a summary of opinions at its September meeting showed, heightening the chance of more rate hikes.

But investors sold the yen on receding bets for a back-to-back rate hike this month as the summary showed a government representative urging the central bank to tread cautiously in further rate hikes.

A closely watched quarterly survey, released on Thursday (Oct 1), also showed few signs that inflation expectations were flaring up in a way that warranted immediate rate hikes, further taming expectations for an October hike.

At its September meeting, the BOJ raised rates to a 31-year high of 1.25 per cent. Its governor signalled a new phase focused on keeping inflation from overshooting its target, prodding analysts to project another hike either in October or December.

Most of the opinions in the summary released on Thursday cited the need to follow September's rate hike with further increases in borrowing costs as inflationary pressure mounts.

"If signs of an upward deviation in prices are observed, the Bank will need to accelerate the pace of rate hikes," one member was quoted as saying.

"It is desirable for the Bank to bring the policy interest rate closer to the approximate goal relatively soon" to allow it scope to respond to unexpected developments in the economy, another member said.

Several opinions indicated that underlying inflation had reached or was close to hitting the BOJ's 2 per cent target.

One member said that while the BOJ did not need to take hasty action, it should raise rates to prevent excessive and persistent price rises, with underlying inflation seen reaching 2 per cent before long.

The BOJ faces greater pressure to raise rates than other central banks, as its policy rate remains near the bottom of the estimated 1.1 per cent to 2.5 per cent range of Japan's nominal neutral rate - the level that neither cools nor overheats growth.

"The Bank should continue to act in a timely manner without becoming overly cautious" in raising rates, given significant upside price risks, one member said, adding that the bank should enhance analysis of its neutral rate estimate.

HEADWIND TO HIKES

Not everyone on the nine-member policy board saw conditions as ripe for rate hikes. Two doves, Toichiro Asada and Ayano Sato, dissented from September's decision to tighten policy.

The summary included some opinions, likely from them, warning of lacklustre consumption and subdued growth in services inflation as reasons to stand pat on policy.

A Cabinet Office representative at the meeting also urged the BOJ to "examine carefully the cumulative effects of past interest rate hikes", the summary showed, a sign of concern over the potential hit to the economy from higher rates.

"Looking ahead, it may be necessary for the Bank to take into consideration its estimates of the neutral rate," the representative was quoted as saying, urging caution in further hikes.

While the summary does not disclose the identities of commenting participants, Economy Minister Minoru Kiuchi represented the Cabinet Office at the September meeting.

Kiuchi is seen as a reflationist ally of premier Sanae Takaichi, herself viewed as cautious about BOJ rate hikes that could push up the cost of funding her ambitious spending plans.

The yen weakened beyond 158 per dollar on Thursday as some investors saw the representative's remarks as signalling the resistance the BOJ could face in pushing up rates further.

"The government seemed to be saying the BOJ's policy normalisation is close to completion, and that additional rate hikes may be unnecessary," said Katsutoshi Inadome, a senior strategist at Sumitomo Mitsui Trust Asset Management.