The Board discussed the risk of inflation overshoots in July – Summary
Governor Ueda’s rate hike signal likely due to debates with aggressive stance
Some members warned of premature increases and weak consumption
BOJ raised interest rates at meeting on July 30 and 31 and presented plan to reduce bond yields
New heading, paragraph 1, addition of context in paragraph 2
By Leika Kihara
Tokyo, August 8 (Reuters) –Bank of Japan policymakers discussed a sharp increase in interest rates last month, including further rate hikes, a summary of Thursday’s discussion showed, triggering a shift toward tighter monetary policy that contributed to turmoil in global markets.
A member of the monetary policy panel said the central bank should ultimately raise its benchmark interest rate to around 1% or more, according to the summary of statements, marking the first time a BOJ policymaker has set a possible end point.
In the surprise move on July 31, the central bank increased its short-term political goal The central bank raised its inflation target from zero to 0.1 percent to 0.25 percent, the highest in 15 years, and released a plan to reduce its massive asset purchases – a groundbreaking departure from a decade-long stimulus program.
The increase in July and the subsequent Comments by BOJ Governor Kazuo Ueda, which hinted at the possibility of further rate hikes – along with indications that the Federal Reserve was preparing to cut U.S. interest rates – caused a sharp rise in the battered yen and added to the turmoil in global markets.
The nine-member council discussed the risk that rising import costs and steady wage increases could push up inflation more than expected, the summary shows, underscoring the growing conviction within the council that further interest rate hikes may be needed.
“The BOJ may need to further adjust the degree of its monetary easing if necessary,” a member was quoted as saying, even after the July rate hike if companies continue to raise prices, wages and capital spending.
Those discussions, which market participants said were more aggressive than expected on Thursday, were likely the reason for Ueda’s market-moving comments. The ensuing defeat led to remarks by the BOJ’s deputy governor Shinichi Uchida on Wednesday and downplayed the possibility of a short-term interest rate hike.
Finance Minister Shunichi Suzuki declined to comment on Uchida’s comments on Thursday and said at a press conference that the central bank would have to decide on the details of monetary policy.
Focus on exceeding inflation
A board member in July urged the BOJ to continue raising interest rates “in a timely and gradual manner” as Japan’s neutral interest rate – the level of borrowing costs that neither cools nor overheats the economy – appears to be at least around 1%, the summary showed.
This was the first time that a BOJ policymaker, albeit anonymously, gave a specific level for Japan’s neutral interest rate.
Ueda has repeatedly said it is difficult to determine the neutral interest rate for Japan, leaving markets wondering how far the central bank will cut rates. While the BOJ does not provide an official estimate of the neutral interest rate, analysts expect it to be between 1% and 1.5%.
At the July meeting, some members warned against raising interest rates too soon, saying that normalising monetary policy should not be an end in itself, as recent data showed weak signs of consumption. Two board members voted against the July rate hike.
However, discussions on the price outlook focused on the risk of inflation overshooting, the summary shows.
“The likelihood of achieving our inflation target has increased further. However, we need to pay attention to the upside risks to prices as more and more sectors are experiencing supply bottlenecks and excess demand due to labor shortages,” said a board member.
“Upward pressure on prices is likely to persist due to tight labor market conditions” and import prices will rise due to the impact of the yen’s decline, another report said.
Reporting by Leika Kihara in Tokyo; Editing by Christian Schmollinger, Christopher Cushing and William Mallard
