BOJ Minutes Highlight Cautious Approach to Rate Hikes Amidst US Uncertainty

The Bank of Japan (BOJ) board agreed in October to continue raising interest rates if the economy performs as expected, but some members expressed caution due to uncertainty surrounding US economic policy, according to minutes released by the central bank on Tuesday, as reported by Reuters.

The BOJ's October 30-31 meeting took place before Donald Trump's victory in the US presidential election, leading board members to warn of potential market volatility and significant changes to US economic policies.

"We can spend time scrutinising U.S. developments, including those after the U.S. presidential election, as we had already been expecting to raise rates at a moderate pace," one board member stated in the minutes.

Despite these external concerns, the BOJ board generally expressed optimism about Japan's domestic economic outlook. Several members noted that expectations of higher wages would likely bolster consumption and keep Japan on track to achieve the BOJ's 2% inflation target.

"Wage growth is likely to remain elevated in next year's spring wage negotiations" between companies and labor unions, according to several board members.

The BOJ maintained interest rates at 0.25% at the October meeting but signaled its readiness to raise borrowing costs in the near future, contingent upon economic and price projections being met.

However, the board also emphasized the need for vigilance due to various risks.

"We must guide monetary policy cautiously given heightening uncertainty at home and abroad," one member stated, explaining the rationale for holding rates steady in October.

"The BOJ must spend time and be cautious" in deciding when to raise rates, given that Japan's policy rate has not exceeded 0.5% for the past three decades, another board member noted.

The BOJ subsequently kept rates unchanged at a December meeting, pending further data on wage growth and clarity on President-elect Trump's policies.

The central bank ended negative interest rates in March and raised its short-term policy target to 0.25% in July. It has signaled a willingness to hike rates again if wages and prices align with projections.

Analysts polled by Reuters earlier this month unanimously predicted that the BOJ would raise rates to 0.50% by the end of March, although there was divergence on the timing within that timeframe.