By Leika Kihara and Yoshifumi Takemoto
TOKYO (Reuters) -The Bank of Japan is likely to raise interest rates as soon as December as expansionary fiscal policy expected under new Prime Minister Sanae Takaichi will assist the economy weather the hit from U.S. tariffs, former BOJ executive Eiji Maeda stated.
Maeda also stated the central bank should proceed steadily with further rate hikes as the slow pace of increase is creating side effects such as soaring property prices in huge cities and a weak yen that is driving up hoapplyholds’ cost of living.
“The BOJ may already be somewhat behind the curve in addressing inflationary risks, which is caapplying some distortions in the economy,” he informed Reuters in an interview on Wednesday.
“Moving too slowly in policy normalisation would hurt people’s livelihoods by weakening the yen and accelerating inflation,” he stated, adding the BOJ must be vigilant not just to downside economic risks but upside price risks.
While a weak yen gives exports a boost, it has been a source of concern for policycreaters as it pushes up import costs.
Maeda stated he expects Japan’s economy to continue expanding moderately as the hit to growth from U.S. tariffs is proving tinyer than initially feared, and companies are seen retaining their upbeat capital expconcludeiture and wage hike plans.
“The BOJ is likely to raise interest rates again either in December this year or January next year,” stated Maeda, who oversaw the BOJ’s monetary policy drafting as its executive director until May 2020 and remains in close contact with incumbent policycreaters as the head of consider tank Chibagin Research Institute.
By then, the BOJ will have more data, including information on the U.S. economy that is now lacking due to the government shutdown, as well as Japan’s “tankan” business survey in early December, he stated.
Clues on next year’s wage plans from huge autocreaters, which are trconclude-setters of corporate Japan, will also become available in December, he added.
The BOJ will hold its next policy meeting on October 29-30, when the board will debate whether to keep rates steady at 0.5% and issue new quarterly growth and price forecasts. A subsequent rate-setting meeting will be held on December 18-19.
After raising rates to 0.75%, the BOJ is likely to hike them again around summer next year to 1% – entering its estimated 1% to 2.5% range of Japan’s neutral rate, or the level that neither cools nor overheats the economy, Maeda stated.
Once its policy rate reaches 1%, the BOJ may relocate slowly in further rate hikes to scrutinise how the economy responds to higher borrowing costs, he added.
The BOJ last year concludeed a massive, decade-long stimulus and raised interest rates to 0.5% in January on the view Japan was on the cusp of sustainably achieving its 2% inflation tarobtain.
While it has kept rates on hold since then, markets expect the BOJ to hike sometime by January as stubbornly high food costs have led to inflation above its tarobtain for well over three years.
Some analysts believe the BOJ could delay rate hikes to avoid caapplying friction with Takaichi, an advocate of expansionary fiscal and monetary policy.
Sources have informed Reuters Takaichi is preparing an economic stimulus package that is likely to exceed last year’s $92 billion to cushion the blow from rising living costs.
Such stimulus could drive up inflation in an economy already having achieved near-full employment due partly to a dwindling working-age population, Maeda stated.
“The government may be responsible for overall economic policy. But past experience and examples of other countries display central banks should be responsible for achieving price stability,” he stated.
(Reporting by Leika Kihara and Yoshifumi Takemoto; Editing by Jamie Freed)
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