Bank Of Japan Sits Tight On Interest Rates, With Two Dissenters

The Bank of Japan kept its benchmark rate unchanged, with two dissenters calling for a rate hike at the central bank’s first meeting since monetary easing advocate Sanae Takaichi became prime minister last week. The yen weakened.

The BOJ held its policy rate at 0.5% Thursday at the end of a two-day gathering, according to a statement. The result was in line with the expectations of 90% of economists surveyed by Bloomberg. Naoki Tamura and Hajime Takata voted against the decision to stand pat for a second consecutive meeting.

The yen reversed course after the decision, sliding to 153.14 to the dollar from 152.19 just before the announcement. The decision came hours after the Federal Reserve lowered borrowing costs for a second time this year while casting doubt on whether to expect another move in December.

The outcome is consistent with Governor Kazuo Ueda’s intention to proceed cautiously with policy normalization as he navigates uncertainties that include the political landscape following Takaichi’s emergence as premier. A key focus of this gathering was the board’s vote. The steady number of dissenters sends a fresh reminder that a rate hike could come as early as December.

Tamura and Takata called for raising the benchmark rate to 0.75%, as they did last month, when their dissenting votes marked the first time Governor Ueda was confronted by more than one voice opposing leaving rates steady.

The unchanged voting dynamics suggests little urgency to hike for the time being. Many on the board may want to avoid fueling expectations for a rate hike at this point with the next policy meeting still seven weeks away.

In its latest quarterly economic outlook report, the BOJ revised its growth forecast for the current fiscal year to 0.7% from 0.6% in the previous projection. That compares with a median private economist forecast of 0.8% in a Bloomberg survey. 

The BOJ said price risks are generally balanced while economic risks are to the downside for next fiscal year. The board reiterated a standing pledge to raise the benchmark rate if the economy and prices perform in line with the bank’s forecasts. It noted uncertainty persists over the global impact of trade policies.

The central bank kept its view that underlying inflation will meet its goal in the second half of the BOJ’s three-year projection period through early 2028, in a sign that economic conditions are developing in line with its outlook.

In a Bloomberg survey published last week, almost every BOJ watcher expected a rate hike by January, with some 50% penciling in a move at the next meeting in December.

Japan’s key price indicator extended its streak of staying at or above the BOJ’s 2% target for three and a half years in a government report last week. Takaichi has pledged to address a cost of living crunch as a top priority, after voter frustration over rising prices contributed to her ruling Liberal Democratic Party suffering major setbacks in the last two national elections. The ruling coalition was left having to govern without a majority in either house of a parliament. 

Wage trends continue to support the case for another rate hike for the most part. Japan’s largest labor union federation, known as Rengo, said earlier this month it will seek a pay increase of at least 5% for next fiscal year in annual negotiations set to start later this year. It would be the third straight year wage increases reached that threshold at large companies under its umbrella. 

Still, conditions are tighter at smaller enterprises. The BOJ’s latest Tankan survey showed that confidence among the nation’s large manufacturers improved for a second quarter and sentiment at large non-manufacturers stayed near the highest since the early 1990s. But gauges for smaller firms were less robust, with the outlook at small manufacturers staying slightly pessimistic for a third straight quarter.

While the constituents of Rengo — roughly 10% of the total workforce — achieved out-sized wage gains in recent years, the vast majority of workers saw compensation rise slower than the roughly 2%-3% pace of consumer inflation during that period, leading to declines in real wages.

Ueda is expected to hold a press briefing that generally starts at 3:30 p.m., where he’ll elaborate on today’s policy decision and explain his thinking with regards to the rate trajectory from here.