Kihara Laika
TOKYO (Reuters) - The Bank of Japan is likely to raise interest rates next week barring any market shocks when U.S. President-elect Donald Trump takes office, five people said, maintaining a pledge to keep pushing borrowing higher if the economy continues to recover. Cost sources familiar with its thinking.
However, sources said the central bank may not provide clear guidance on the pace of future rate hikes or the ultimate magnitude of the hike.
Based on current guidance, the Bank of Japan has pledged to continue raising short-term policy rates if economic and price developments are in line with its forecasts.
"For the BOJ, there's really not much to add or change to the guidance given that real interest rates remain low," one source said. Another source echoed this view.
Bank of Japan Governor Kazuo Ueda and his deputy said earlier this week that the BOJ would debate whether to raise interest rates, signaling its intention to raise borrowing costs at its Jan. 23-24 meeting unless Trump Monday's inauguration speech upended markets.
Therefore, the market expects that there is more than 80% chance that short-term interest rates will be raised from 0.25% to 0.5% next week, which will bring the Bank of Japan's policy rate to the highest level since 2008.
"They seemed to be saying, rather than saying, we're going to raise interest rates," DeepMacro CEO Jeffrey Young said of the comments by Ueda and Deputy Governor Ryozo Himino.
"Growth is in line with trend, the output gap has largely narrowed and turned positive, and inflation is at or above target. Why keep the nominal policy rate at 25 basis points when real rates are very negative?"
Sources said the Bank of Japan is likely to continue to act unless Trump's speech and any executive orders he issues next week cause severe market dislocation. The sources spoke on condition of anonymity because they were not authorized to speak publicly.
"The market seems to have gotten the message from the BOJ," one source said.
"While a rate hike next week is certainly not a done deal, the only remaining hurdle is what Trump will say and how markets are likely to react," another source said.
Interest rates are far from neutral
With a rate hike next week all but a foregone conclusion, market attention is turning to any clues the Bank of Japan might provide about the pace and timing of further hikes.
The Bank of Japan is likely to raise its inflation forecast in its quarterly outlook report and may highlight upside risks from high import costs due to persistent yen weakness, sources said.
Sources said that while many analysts expect the Bank of Japan to raise interest rates to 0.75% in the second half of this year, the bank may not give many clues on the timing of its next move.
The BOJ also has no plans (at least for now) to provide details beyond staff estimates of Japan’s neutral rate, which show an inflation-adjusted neutral rate in a range of around -1% to 0.5%.
The staff estimated that if inflation expectations stabilize around the BOJ's 2% target, the BOJ could raise short-term interest rates to at least around 1% without cooling economic growth.
Ueda declined to reveal the exact level of Japan's neutral interest rate, saying it was difficult to come up with credible estimates due to a lack of data.
Even if the Bank of Japan raises interest rates next week, short-term interest rates will remain well below neutral, sources said, adding that it was too early to discuss any major changes to its guidance on the future policy path.
"With so much uncertainty surrounding the outlook, it is impossible to preset a clear path or pace for future policy initiatives," a third source said.
The Bank of Japan ended negative interest rates in March and raised its short-term interest rate target to 0.25% in July as Japan looks to continue to achieve the bank's 2% inflation target.
Ueda has said he is ready to raise interest rates further if expanding wage increases can support consumption and allow companies to continue raising prices not only for goods but also for services.
(Reporting by Reika Kihara; Additional reporting by Takahiko Wada, Takaya Yamaguchi and Makiko Yamazaki; Editing by Kim Coghill)