The Bank of Japan can raise interest rates at a pace in line with dominant views among financial markets and economists, its Deputy Governor Shinichi Uchida said, keeping alive expectations that there is a chance of a near-term increase in borrowing costs.
While he declined to say how soon the BOJ could raise rates, Uchida essentially ruled out another hike at the bank's next meeting on March 18-19 by saying it "wasn't as if we would hike rates at every meeting."
"We can look at how the economy and prices respond (to a rate hike), then decide whether to raise rates again," Uchida told a news conference on Wednesday, suggesting his preference to spend time gauging the impact of past policy steps before proceeding with further increases.
"The pace of rate hikes will depend on economic and price developments at the time," he added.
The BOJ raised its short-term policy rate to 0.5% from 0.25% in January on the view that Japan was making progress towards durably achieving its 2% inflation target.
Uchida warned of the need for vigilance due to strong uncertainty over the global economic outlook due in part to U.S. President Donald Trump's policies and geo-political tensions.
But he was upbeat on Japan's economy, saying consumption will likely be underpinned by solid pay increases expected in this year's wage talks between firms and unions.
With underlying inflation accelerating gradually and wages rising, raising interest rates "will lead to stability in economic activity and prices in the long run," he said.
"If our economic and price projections outlined in our latest outlook report in January are realised, we will continue to raise the policy rate," Uchida said in a speech delivered to business leaders in Shizuoka before the news conference.
The remarks suggest the BOJ's rate-hike resolve has been undeterred so far by Trump's 25% tariffs on goods from Canada and Mexico, a doubling of duties on Chinese goods to 20%, and threats of levies against other countries that have stoked fears of a global economic slowdown.
Markets are roughly pricing in a rate hike to 0.75% around July, followed by another increase to 1% early next year, according to a chart attached to Uchida's speech text posted on the BOJ's website.
NEUTRAL RATE NO GUIDE
Uchida is known for his record of dropping strong hints on the policy outlook. A lack of clear signals on the timing of further rate hikes left markets with the impression that the comments were neutral to somewhat dovish.
"They weren't that hawkish," Tsuyoshi Ueno, an economist at NLI Research Institute, said of Uchida's remarks. "They are in line with the BOJ's official view," he said.
Uchida said the BOJ expects annual consumer inflation to slow towards its 2% target as cost-push pressures wane, while underlying inflation will accelerate towards 2% accompanied by wage gains.
"As a result, both actual inflation and underlying inflation are expected to be at around 2%" sometime during the period from the second half of fiscal 2025 to fiscal 2026, he said.
By then, the BOJ's policy rate would have approached levels deemed neutral to the economy, which its staff estimates to be in a range of 1% to 2.5% on a nominal basis when assuming inflation moves around 2%, Uchida said.
But he said the estimates are subject to estimation error and set in too wide a range to be used for actual conduct of monetary policy, calling instead to set the rate hike timing by looking closely at economic and price developments.
"In practice, (the neutral rate level) is something we will know while examining how the economy and prices respond to our interest rate hikes," Uchida said.
"If it's at a pace in line with expectations, it will be possible for us to proceed with rate hikes while examining how the economy responds," he said.
Japan's solid October-December GDP data, coupled with recent strong inflation, have pushed up the yen and bond yields by cementing expectations of a near-term rate hike.
Japan's economy expanded an annualised 2.8% in the final quarter of last year on solid corporate and household spending. Core consumer inflation hit 3.2% in January, its fastest pace in 19 months and exceeding the BOJ's 2% target for nearly three years.
