Former senior Bank of Japan official predicts that the interest rate hike in October is “practical”, and the probability of postponing it until next year is extremely low

The Zhitong Finance App learned that a former executive director of the Bank of Japan in charge of monetary policy said that the Bank of Japan may raise the benchmark interest rate for the second month in a row at the October policy meeting. This point in time was earlier than most economists' expectations.

“The basic rhythm is probably once every three months, but there is also a reasonable possibility that the Bank of Japan will raise interest rates for two consecutive meetings,” former executive director Kazuo Moma said in an interview last Friday. “I think this probability is around 20% to 30%.”

A week before Momma made these remarks, Governor Ueda Kazuo's board of directors raised policy interest rates, only three months apart from the June rate hike, marking an acceleration in the previous pace of interest rate hikes about every six months. Kazuo Ueda explained that the Bank of Japan has entered a new phase, shifting its focus from driving basic inflation back to 2% to preventing it from exceeding this target level.

Momma said the wording was intended to signal to the market that now that the policy focus has changed, a faster pace of interest rate hikes may be imminent.

“The Bank of Japan has been stressing that core inflation is likely to rise above 2%,” Momma said. “Given this, I don't think this risk will abate in the next three months. If anything changes, it's more likely to be an increase.”

The price trend data released by the Bank of Japan on Friday confirmed this judgment. The central bank's inflation target, which excludes fresh food and temporary factors, accelerated to 2.6% in August, up from 2.3% in July. Momma said that in addition to the risk of rising prices, the Bank of Japan also emphasized that the benchmark interest rate is still low at 1.25%.

“Putting these two points together, the most compelling argument at present is that the Bank of Japan should raise interest rates relatively quickly,” said Momma, the current executive economist at Mizuho Research & Technologies.

In Momma's basic scenario, the Bank of Japan's policy interest rate will rise to a terminal interest rate of about 2% in June or July next year, which means that the board of directors may also raise interest rates by 25 basis points three times. According to the median expectations of economists surveyed, the market generally expects the final interest rate to be 1.75%.

According to reports, this month is the first time that the Bank of Japan, the Federal Reserve, and the European Central Bank have all raised interest rates within the same month.

After the Bank of Japan meeting in September, despite interest rate adjustments, the yen weakened as two board members — Toichiro Asada and Ayano Sato — voted against the rate hike. These two are the latest board members appointed by Prime Minister Sanae Takaichi earlier this year, and Sanae Takaichi has always supported monetary easing policies.

“I don't know if there will be another negative vote, but I don't think they will change the course of the Bank of Japan's interest rate hike,” Momma said. The government is unlikely to try to prevent the Bank of Japan from normalizing its policies, as this may cause the yen to weaken further. A weak yen will increase inflationary pressure as Japan is heavily dependent on imports for energy and food needs.

The overnight swap market's pricing shows that as of last Friday, traders think there is a 30% chance of raising interest rates at the next decision meeting on October 30.

Economists are cautious in judging the pace of interest rate hikes. According to a survey conducted before the September meeting, 58% of respondents believed that the Bank of Japan's next rate hike would be in January next year, and about 35% judged that it would be in December. Momma doesn't agree with most people's views.

“The focus of the debate is actually whether the Bank of Japan will come to a conclusion that it cannot wait until December to raise interest rates,” Momma said. “I think it is extremely unlikely that the next rate hike will be postponed until January or later.”