Written by Leika Kihara
TOKYO (Reuters) – The Bank of Japan is expected to keep monetary policy steady on Friday, but signaled its confidence that strong wage growth and spending will allow the central bank to raise interest rates again in the coming months.
Such hawkish communication would contrast with many other central banks now transitioning into a rate-cutting cycle, including the US Federal Reserve, which announced a major cut in borrowing costs on Wednesday.
The split could cause market turmoil on expectations of a narrowing of the US-Japan interest rate differential that has already helped the yen recover to around 143 against the dollar, from a near-decade low of 161.99 in early July.
Markets are focused on any hints from Governor Kazuo Ueda on the timing and pace of future rate hikes at his post-meeting news conference.
“Having recently raised rates in July, the BOJ may choose to closely monitor market developments for the time being,” said former BOJ chief Nobuyasu Atago.
“It's natural to think the next rate hike will come in December” so the BOJ can gauge the impact of Fed rate cuts and political events such as Japan's ruling party leadership race and the US presidential election, he said.
At a two-day policy meeting that concludes on Friday, the BOJ is widely expected to keep short-term interest rates steady at 0.25%, and maintain its view that the economy will continue to recover moderately as rising wages support consumption.
Most economists polled by Reuters expect the BOJ to raise rates again this year with many betting on a December hike. No one in the survey indicated a rate increase this month.
The BOJ ended negative interest rates in March and raised short-term rates to 0.25% in July, in a historic shift away from a decade-long stimulus program aimed at ending monetary policy.
Governor Ueda emphasized the BOJ's readiness to raise rates further if inflation remains on track to firmly reach its 2% target, as the board is currently doing.
Consumer inflation reached 2.8% in August to accelerate for the fourth consecutive month, data showed on Friday, keeping alive expectations for an interest rate hike.
An opportunity to test the data against cautious speculation will come at the BOJ's Oct. 30-31, where the board will make a quarterly review of its forecasts.
Japan's economy grew by an annualized 2.9% in April-June and real wages rose for two straight months in July, easing fears that rising costs of living will dampen spending.
But soft demand in China, slowing US growth and the yen's recent rebound are clouding the outlook for the export-reliant country.
Market volatility remains a key concern for BOJ policymakers after July's rate hike and hawkish remarks from Ueda triggered a stronger yen and a sharp drop in inflation.
Several BOJ policymakers have called for a closer look at market movements in setting policy. But they reiterated that the bank is determined to continue raising rates, with one hawkish board member saying that short-term rates should eventually rise to around 1%.
