By Leika Kihara
TOKYO (Reuters) – The prospect of stable incomes in Japan and rising investment costs in the weak yen have raised concerns within the central bank that rising inflationary pressures could lead to an improvement in inflation this month, sources said.
Even if the Bank of Japan were to raise its inflation forecast, the revision alone will not lead to a rise in interest rates if it is driven by temporary factors such as rising rice prices and higher import costs, three sources familiar with the matter said. bank thinking.
The BOJ could raise rates this month if the board is confident that steady, broad-based wage increases will take hold, and keep inflation permanently at the 2% target, they said.
“Inflation risks are looking higher due to the recent fall in the yen,” one of the sources said, a view echoed by another source.
“Wage strength also appears to be strong,” said a third source, adding that the board may discuss revising its inflation forecast for the fiscal year starting in April.
The BOJ will discuss whether to raise interest rates from the current 0.25% at its policy meeting on January 23-24. It will also release new quarterly growth and price forecasts that serve as the basis for setting monetary policy.
Under current forecasts, the board expects core consumer price inflation to hit 1.9% in both fiscal 2025 and 2026. Although the board has not yet discussed the details of its forecast, recent data and surveys have shown an increase in inflationary pressure.
The yen is currently hovering around 158 to the dollar, down from around 140 hit in September and close to the levels hit when the BOJ raised rates in July last year.
Inflation rose in November to 2.7% as a weaker yen pushed up the cost of imports, adding to higher rice prices.
Rising wages added to inflationary pressures, supporting the BOJ's argument that Japan is on track to sustainably reach its 2 percent inflation target – a requirement for rate hikes.
Wage increases are spreading across companies of all sizes and sectors, the BOJ said in a quarterly report Thursday, indicating that the conditions for a near-term rate hike continue to fall into place.
“The need to raise wages is widely shared among small firms,” Kazushige Kamiyama, head of the BOJ's Osaka branch, told a news release on Thursday. “We can expect solid earnings this year.”
While such optimism raises the possibility of a rate hike at the BOJ's January meeting, Governor Kazuo Ueda has cited uncertainty over US President-elect Donald Trump's policy as a reason to tread cautiously on raising borrowing costs.
If the ideas and policies were announced after Trump's inauguration on Jan. 20 causes volatile market movements, the BOJ may also freeze rates, some analysts say.
Markets are focusing on BOJ Vice Governor Ryozo Himino's speech and press conference on Tuesday, to get new hints on whether the bank could raise rates this month.