By Leika Kihara
TOKYO, Jan 28 (Reuters) – The Bank of Japan considered mounting inflationary pressures stemming from a weak yen and labour shortages, among other factors, as key influences for the timing of additional interest rate hikes, minutes from a December meeting showed on Wednesday.
The discussions reflected the board’s readiness to continue raising still-low borrowing costs even after its decision in December to raise the policy rate to a 30-year high of 0.75%.
The nine-member board agreed that subsequent rate hikes would depend on economic conditions and inflation forecasts materialising, the minutes showed.
While some members preferred treading cautiously on future rate hikes, others said inflation was becoming more entrenched and persistent as companies pass on wage increases alongside raw material costs, according to the minutes.
A weak yen adds to inflationary pressure by pushing up import costs at a time when more businesses were actively raising wages and prices, some members said.
“Although addressing currency market moves is not itself the purpose of monetary policy, the BOJ should give consideration to the impact of the yen’s slide on inflation rates, and in some cases, underlying inflation, in deciding whether to raise the policy rate,” the minutes quoted some members as saying.
A weak yen has become a source of concern for policymakers, as it hurts households through rising cost of living, a focal point in Japan’s general election on February 8.
After sliding near the key 160-per-dollar mark earlier in January, the yen rallied as much as 3% over the last two sessions to around 153 amid speculation of U.S. and Japan rate checks – often seen as a precursor to official intervention.
One member said the yen’s fall and rising long-term interest rates were partly due to the BOJ’s policy rate being too low relative to the rate of inflation, the minutes said.
“Raising the policy rate in a timely manner could curb future inflationary pressure and hold down long-term rates,” the member was quoted as saying.
With core consumer inflation exceeding the BOJ’s 2% target for nearly four years, markets speculate that additional price pressure from a weak yen could lead to a rise in interest rates again in the coming months.
Analysts polled by Reuters earlier this month expected the BOJ to wait until July before raising rates again, with more than 75% of them projecting rates will climb to 1% or higher by September.
The swap market has priced in roughly an 80% chance of a rate hike to 1.0% by April on the view that the yen’s recent declines will speed up inflation.
While most members said the BOJ should not have a pre-set timeline on the pace of rate hikes, one suggested tightening in “intervals of a few months” as its policy rate remained distant from levels deemed neutral to the economy, the minutes showed.
Another member underlined the importance of assessing a broad range of indicators, including anecdotal data, to determine whether a sustained mechanism of moderate wage and price increases had taken hold.
(Reporting by Leika Kihara; Editing by Himani Sarkar and Jacqueline Wong)
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