By Leika Kihara
TOKYO (Reuters) – The Bank of Japan’s meeting last week passed with no surprises, but for a careful BOJ watcher its message on the necessity to remain vigilant on food-driven inflationary pressures had a crucial takeaway: Rates might be raised before expected.
As with many other central banks, the Trump administration’s broad tariffs against its trading partners have raised uncertainty for Japan’s monetary path as policymakers tread cautiously while they fight to evaluate the economic implications of the rapid-fire bursts of U.S. duties.
All the identical, growing signs of sticky food inflation, which adds to prospects of sustained wage increases, will likely keep the BOJ on target to boost rates at a gradual pace in contrast with more rate cuts signalled by its U.S. and European counterparts.
Highlighting an issue that many major central banks are grappling with, BOJ Governor Kazuo Ueda warned of heightened uncertainty over how higher U.S. tariffs could affect the worldwide economy, in explaining the bank’s decision to maintain rates of interest regular on Wednesday.
However the BOJ can incorporate to some extent the potential impact from Trump tariffs in its quarterly outlook report due at its next meeting on April 30-May 1, Ueda said, signalling a rate hike on the meeting can’t be completely ruled out regardless that current consensus is for a tightening to occur across the third quarter.
He also balanced concerns over global uncertainty with hawkish signals on the domestic price outlook, suggesting the BOJ was unwavering in its resolve to maintain climbing short-term rates from the present 0.5%.
Contrary to past remarks playing down food inflation as temporary, Ueda said stubbornly high food costs could have an enduring impact on underlying inflation and public perceptions on future price moves – each aspects seen by the BOJ as key to the pace and timing of further rate hikes.
“Rising food costs are frequently seen as supply shocks that will be neglected. Nonetheless, the prolonged increase in rice prices means the chance of those rises affecting inflation expectations and public sentiment will not be negligible. As such, we’ll need to observe such risks rigorously,” Ueda said.
Ueda also said some on the board “mentioned the necessity to remain vigilant to upside price risks,” a rare revelation of actual deliberations on the meeting that highlighted growing worries inside the BOJ on domestic inflationary risks.
“If upside risks to underlying inflation heighten, that shall be a reason to speed up our strategy of adjusting the degree of monetary support,” he added, a transparent signal the BOJ won’t draw back from an earlier-than-expected rate hike to anchor inflation expectations.
Food prices have been rising in Japan since global commodity costs surged after the Ukraine war, and remain elevated attributable to various aspects including rising import costs from a weak yen. The soaring price of rice, triggered by last 12 months’s bad crop from a hot summer, has added to the inflationary pressure.
‘LIVE’ MAY MEETING?
Ueda’s remarks underscore the growing attention the BOJ is putting on stubbornly high food prices which have kept inflation above its goal for nearly three years.
Core inflation hit 3.0% in February as food prices rose 5.6% from year-before levels, accelerating the pace of increase for the seventh straight month. Japan’s staple rice saw prices soar 81.4%, the fastest pace of increase in nearly half a century.
“The BOJ doesn’t have control over supply shocks like rising food prices, but what’s vital is how long this may last,” said a source conversant in the bank’s considering.
“If it persists, it could materially change the best way people see future price moves and justify rate hikes,” one other source said on rising food costs. Each sources spoke on condition of anonymity as they weren’t authorised to talk publicly.
To ensure, the BOJ is in no rush to boost rates with higher wages yet to cause a spike in services inflation, which stood at 1.3% in February. Long-term inflation expectations, which the central bank focuses on in setting policy, have also shown no sharp deviation from its 2% inflation goal.
Still, the actual fact Ueda flagged the chance of an inflation overshoot is notable as an indication uncertainty over Trump’s policies alone won’t hold back the BOJ from raising rates, analysts say.
“The BOJ probably didn’t want market bets of a near-term motion to recede an excessive amount of,” said Naomi Muguruma, chief bond strategist at Mitsubishi UFJ Morgan Stanley Securities.
“True, there are headwinds blowing from Trump. However the BOJ appears keen to hike once tailwinds begin to blow. It wants to make sure any early rate hike won’t turn right into a market surprise.”
For now, the dominant market view is for the BOJ to carry fire on the April 30-May 1 meeting to spend more time gauging the fallout from Trump’s tariff policies.
A Reuters poll showed many analysts expect the BOJ’s next rate hike to are available in the third quarter, probably in July.
But some BOJ watchers see recent wage and price data pretty much as good enough reason for the central bank to act as soon as May 1, including former BOJ official Nobuyasu Atago.
“I do not think the BOJ has made up its mind yet but to me, Ueda’s remarks sounded as if May might be a live meeting,” said Atago, who’s currently chief economist at Rakuten Securities Economic Research Institute.
“When prices of products people buy ceaselessly keep rising for therefore long, central banks must act. I’m sure the BOJ may be very mindful of the chance of leaving food inflation unattended.”
(Reporting by Leika Kihara; Editing by Shri Navaratnam)