Minutes of the July meeting show huge committee divisions! Bank of Japan's rate hike process may continue to be blocked

According to the latest information from the Smart Finance APP, the minutes of the Bank of Japan's July meeting show that there is a significant divergence among the policymakers of the Bank of Japan on the pace and magnitude of further interest rate hikes, highlighting the huge uncertainty about the timing of the next increase in borrowing costs in Japan. On July 31st, the Bank of Japan unexpectedly announced a rate hike, which some investment institutions believe triggered the global stock market crash known as "Black Monday in August." After investors were shocked by the unexpected rate hike and hawkish views in July, the Bank of Japan seemed to be apprehensive and paused the rate hike in September as expected by the market.

The minutes of this meeting show that at the monetary policy meeting in July, the Bank of Japan's Monetary Policy Committee unexpectedly voted 7-2 to raise short-term interest rates to 0.25%, taking another step towards gradually phasing out the massive stimulus policies of the past decade.

The minutes released on Thursday also show that among the nine members of the committee, at least two believed there was room for further rate hikes, with one suggesting that the Bank of Japan should "timely and gradually" raise borrowing costs to avoid being forced to hike rates rapidly in the future.

Another member stated that once it is confirmed that companies are increasing capital expenditures, wages, and raising prices of goods, the Bank of Japan must further raise the benchmark interest rate.

However, other committee members unanimously warned against being too hasty in phasing out stimulus measures, setting the tone for most members to support pausing the rate hike in September, ultimately leading the Bank of Japan to keep the benchmark rate unchanged last week as expected by the market.

Analysts believe that the Bank of Japan's decision to pause the rate hike in September partly reflects the committee members' concerns about the "Black Monday" in the global stock market in August, as the unexpected rate hike by the Bank of Japan was seen as the trigger for that global stock market crash.

"The normalization of monetary policy itself is by no means the goal," the minutes show one member emphasizing, adding that the Bank of Japan must monitor various risks, act cautiously, especially regarding the rate hike process.

Another member stated, "The Bank of Japan should avoid the extreme situation of the market expecting excessive future rate hikes, as inflation expectations have not yet been consistently anchored at the 2% target, and prices are still vulnerable to downward risks."

These dovish comments, along with the strong stance of some hawkish members, highlight the significant divergence within the Bank of Japan's committee on the rate hike process, posing a challenge to Bank of Japan Governor Haruhiko Kuroda in fulfilling his commitment to eventually raise rates to a neutral level (neither stimulating inflation nor cooling economic growth).

The minutes also show that one member stated that given the high uncertainty about the inflation situation in Japan and the estimation of the neutral interest rate of the Bank of Japan, it is difficult to "thoughtlessly" raise the benchmark rate to the expected level.

The member cited remarks made at the July meeting, stating, "Therefore, the Bank of Japan actually has no choice but to make flexible judgments on the policy rate path, while studying how economic data and price curves may react to changes in short-term rates."

The Bank of Japan's unexpected rate hike in July and Governor Haruhiko Kuroda's hawkish remarks, combined with soft U.S. labor market data fueling recession expectations, led to a surge in the yen exchange rate and a sharp drop in global stock markets in early August due to unwinding of yen carry trades On July 31st, Haruhiko Kuroda, Governor of the Bank of Japan, clearly expressed a hawkish interest rate hike tendency, which was believed to trigger a global market crash in early August. Shortly thereafter, members of the Bank of Japan's committee quickly made dovish statements to alleviate market expectations of a rate hike by the Bank of Japan.

Since then, policymakers at the Bank of Japan have consistently emphasized the need to consider the financial market impact of market volatility, implying that the Bank of Japan's rate hike path may not be as aggressive as expected by the market.

After the Bank of Japan decided to keep the benchmark interest rate unchanged in September, Haruhiko Kuroda reiterated that if inflation continues to reach the 2% target, the central bank will continue to raise borrowing costs. However, the Bank of Japan paused its rate hike in September. In the view of market analysts, this further indicates that after the unexpected rate hike and hawkish views in July scared investors, the central bank believes there is no rush to raise rates and emphasizes monitoring the financial markets.

The central bank governor also stated that the Bank of Japan will continue to take time to assess how the uncertainty in the U.S. economy affects Japan's fragile economic recovery, largely indicating that Kuroda is not eager to further push the Bank of Japan to raise rates.

In August, Japan's core consumer inflation rate unexpectedly reached 2.8%, staying at or above the Bank of Japan's targeted 2% level for 29 consecutive months. However, some economists are concerned that Japan's fragile economic recovery could be undermined by a high interest rate environment, which could easily push inflation down to levels below 2%.

On the other hand, as corporate wages steadily rise, supporting Japanese consumer spending to a large extent, the Japanese economy unexpectedly grew by 2.9% in the second quarter on an annualized basis. Domestic capital spending in Japan continued to grow, despite soft demand in the Asian region and the slowdown in U.S. economic growth casting a shadow over the economic growth prospects of this export-dependent country.

"I believe the timing of the next rate hike will depend on the future economic conditions overseas in the coming months, especially the economic conditions in the United States," said Chotaro Morita, Chief Strategist at All Nippon Asset Management. "I think this significantly delays the policy decisions of the Bank of Japan."