By Leika Kihara
TOKYO (Reuters) -The Bank of Japan must raise interest rates more as keeping them at current low levels could cause excessive risk-taking and push up inflation too much, its board member Hajime Takata said, cementing expectations of further hikes in borrowing costs.
But Takata offered few clues on how soon and how far the central bank could raise its policy rate, saying it had no preset idea on the timing and degree of future increases.
Long-term inflation expectations have been rising steadily and companies are becoming more active in passing on higher labour costs, Takata said on Wednesday, signalling that conditions for additional rate hikes were falling into place.
“Inflation is approaching the BOJ’s 2% target with positive corporate behaviour already observed,” Takata said in a speech, adding the BOJ must be mindful of upside risks to inflation.
“It’s important to continue shifting gear gradually on monetary policy, even after January’s rate hike,” as creating expectations that interest rates will stay low for a prolonged period could overheat financial activity, he said.
Takata also said receding fears of renewed financial market volatility gave the BOJ more flexibility in pushing up rates.
The remarks follow recent steady rises in Japanese government bond (JGB) yields, as markets factor in the chance the BOJ could hike rates more aggressively than initially thought on prospects of sustained wage gains.
When asked about the rise in yields, Takata told a briefing that it was a natural reflection of an improving economy, and that inflation-adjusted real borrowing costs remained low.
He also said it was hard to estimate Japan’s neutral interest rate – the level that neither cools nor overheats growth.
“It would be problematic in terms of policy flexibility” for the central bank to announce a certain neutral rate level, as doing so could be interpreted by markets as pre-committing to hike interest rates to a set level, he said.
“We don’t have any preset idea on the timing and level” of future rate hikes, Takata said, adding the decision will be made based on the strength of corporate activity as well as economic and market developments.
After hitting a 15-year high of 1.435%, the 10-year JGB yield fell 0.5 basis points from the previous day at 1.425% on Wednesday.
“The remarks are somewhat hawkish and underscore the bank’s readiness to raise rates,” said Tsuyoshi Ueno, an economist at NLI Research Institute. “But there weren’t many hints on the pace of future rate hikes or the terminal rate,” he said.
The BOJ raised its short-term interest rate to 0.5% from 0.25% in January, reflecting its conviction that Japan was making progress in sustainably achieving its 2% inflation target.
Governor Kazuo Ueda has signalled his readiness to keep raising rates if wages continue to increase and underpin consumption, thereby allowing firms to keep hiking pay.
But he has remained mum on how far the BOJ could go. Hawkish policymaker Naoki Tamura is the only one in the nine-member BOJ board who has specifically mentioned that the bank should raise rates to at least 1%.
Policymakers are now waiting for the outcome of spring wage negotiations. A slew of recent BOJ signals have led markets to price in a roughly 80% chance of a rate hike to 0.75% in July. A private sector survey showed most economists projecting the next hike to come in the latter half of this year.
The yen and Japanese bond yields have risen this week as markets rethink their view that the BOJ won’t push up rates beyond 1% – the lower end of its staff estimate that puts Japan’s nominal neutral rate in a range of 1% to 2.5%.
(Reporting by Leika Kihara; Editing by Tom Hogue, Edwina Gibbs and Kim Coghill)
