Bank of Japan Deputy Governor: The board will discuss the necessity of interest rate hikes next week

According to the Zhitong Finance APP, Bank of Japan Deputy Governor Masayoshi Amamiya stated that the central bank's board will discuss a possible interest rate hike next week, clearly indicating that this option will be considered.

In a speech to local business leaders in Yokohama on Tuesday, Amamiya said, "It is difficult but crucial to judge the right timing when implementing monetary policy," adding, "The board will discuss whether to raise the policy interest rate based on the outlook to be summarized at the monetary policy meeting on January 23-24."

These comments highlight that the Bank of Japan does not rule out the possibility of raising borrowing costs this month, with most observers believing that the central bank will increase borrowing costs in January or March.

Amamiya also mentioned that there are different upward and downward risks, and he shares the view with Governor Kazuo Ueda that the momentum of wage increases this year and the U.S. economic policy under the new government leadership are worth paying attention to.

During Amamiya's speech, the yen fell 0.3% against the dollar to 158.02 but soon rebounded to around 157.50. Japanese government bond futures reduced their losses, while the Tokyo Stock Exchange index fell to a daily low. Overnight index swap contracts estimate about a 60% chance of a rate hike at the Bank of Japan's meeting next week, with an 83% chance in March.

In his last scheduled speech before the Bank of Japan's policy committee meeting next week, Amamiya stated that he expects wage growth to remain robust this year. He mentioned labor shortages, rising minimum wages, and recent surveys indicating that wage increases are roughly at or above the levels from a year ago, when unions and companies agreed to the largest pay raises in 30 years.

Another key issue of concern for observers of the Bank of Japan is how long the central bank wishes to monitor the uncertainties of U.S. economic policy. Amamiya stated that this is a matter the Bank of Japan must continue to pay attention to, although the overall situation may become clearer just days before the central bank's policy meeting, shortly after Trump takes office next week.

Amamiya said, "Continuous monitoring is necessary, but next week's inauguration speech will give us an understanding of the general direction of the policies the new government will adopt." Many experts "expect the U.S. economy to continue performing strongly for some time, which seems to contrast sharply with the outlook when focusing on downside risks around last August."

The deputy governor also reiterated that if the central bank's expectations continue to be realized, it will raise interest rates. Amamiya stated that creating surprises is undesirable unless during an economic crisis. Meanwhile, the market cannot fully digest the results of the policy meeting, as the central bank makes final decisions through discussions at the meeting Insiders told Bloomberg earlier this month that although no interest rate decision has been made yet, Bank of Japan officials may discuss raising inflation expectations at the policy meeting. The insiders indicated that this is mainly due to the recent surge in rice prices and the weakening of the yen since the last outlook report in October.

"The developments in prices and inflation expectations, including the economic mechanisms behind them, seem to have basically gotten back on track," said Haruhiko Kuroda. "If this outlook continues to materialize, the central bank will accordingly raise the policy interest rate and adjust the degree of monetary easing."