The Bank of Japan must move cautiously in raising interest rates as consumption remains weak and small firms may struggle to keep increasing wages, a dovish board member said on Thursday, highlighting uncertainty over the chances of a hike this month.
Toyoaki Nakamura, who did not back the BOJ's decision to raise rates in July, emphasised the risk that inflation may miss the central bank's 2% next fiscal year and beyond, as slowing global growth and soft consumption cloud the economic outlook.
"I am personally not confident about the sustainability of wage growth," Nakamura said in a speech to business leaders in the western Japan city of Hiroshima, adding that consumption lacked momentum as rising living costs hit households.
While big companies are raising pay aggressively to attract talent, some smaller firms are struggling to earn enough profits to keep doing so, he said.
"We're at a critical phase where we need to check much data and cautiously adjust the degree of monetary support in accordance with improvements in the economy," he said.
A former corporate executive, Nakamura is among the most dovish members of the board. He voted against the BOJ's decision to end negative rates in March and the July rate hike to 0.25%.
Nakamura's cautious stance contrasts with other board members who are more eager to raise rates soon, indicating a divergence within the nine-member board that adds to the uncertainty over the possibility of a rate hike this month.
Since the BOJ's rate hike in July, Governor Kazuo Ueda has stressed the central bank's readiness to keep hiking borrowing costs if the economy and prices move in line with its forecast.
The governor has also said wages must keep increasing and firms raise prices for goods and services, for the central bank to hike rates again.
However, he has offered no clear indication on when the next rate hike could occur, leaving market expectations fluctuating between December and January next year.
Just over half of economists polled by Reuters expect the BOJ to raise rates again at its Dec. 18-19 meeting.
Nakamura said Japan must undergo structural changes that boosts the economy's growth potential, for inflation to durably hit 2% inflation - a process he said will take "significant" time.
He added that his focus will be on small firms' ability to increase profits, pass on rising costs and progress in wage growth, as key indicators of Japan's economic health.
