BOJ Former Officials Say Next Japanese Rate Hike Could Be as Early as October

"‘Wage Increase Should Be Reflected in Service Price Hikes’"

As the Japanese yen fell to its lowest level in 34 years, a former Bank of Japan (BOJ) official predicted that the next interest rate hike could come as early as October this year.

On the 1st, Tsutomu Watanabe, a former BOJ chief economist and an inflation expert at the University of Tokyo, said in an interview with Bloomberg News, "I don't think the next move will come that quickly."

[Image source=Reuters Yonhap News]

Professor Watanabe anticipated that "the BOJ is likely to adjust its policy based on data and will not act irrationally." This contrasts with some experts who pointed out that the BOJ might proceed with a second rate hike faster than expected due to the sharp decline in the yen's value against the dollar.

The BOJ raised interest rates for the first time in 17 years on the 19th of last month. Professor Watanabe noted that service prices have been somewhat sluggish and that key inflation data are released after BOJ meetings, saying, "They did not rely on the data at all." He also said, "There must have been an important reason to hurry (the rate hike)," adding, "The weak yen is unlikely to be a catalyst for (the rate hike)."

The BOJ ended its negative interest rate policy and set the upper limit of the benchmark rate at 0.1%. Despite the rate hike, the benchmark rate remains significantly lower than major countries like the United States, where it reaches 5.5%. This is why many experts predict that the yen will continue to face pressure until the U.S. Federal Reserve's (Fed) rate cut outlook becomes clearer.

Professor Watanabe expects the BOJ to focus on how wage increases are reflected in service prices going forward, evaluating that it has not shown impressive acceleration so far. In February, Japan's service prices rose by 2.2%, the same figure as the previous month.

Japan's largest labor union, Rengo (Japanese Trade Union Confederation), announced that wages were raised by an average of 5.3% after the Shunto (spring labor negotiations), marking the highest increase since 1991. To measure the impact of wage increases on service prices, Professor Watanabe said the BOJ needs to wait at least until August. Therefore, October, when the BOJ releases its quarterly inflation outlook reflecting this, is considered an ideal time for a follow-up rate hike.

According to a Bloomberg survey, about 62% of experts expect the BOJ to implement a second rate hike by this fall. Among respondents, 23% forecast a hike in July, and 26% expect it in October.