(Bloomberg) -- The Bank of Japan’s big policy shift this week makes another interest rate hike highly likely in October and raises the potential for quarterly increases, according to a former executive director in charge of monetary policy.
“The chances are very high for an October rate hike,” Kazuo Momma, the former director, told Bloomberg on Thursday. “The BOJ’s policy reaction function has changed now. This means of course that there’s also a chance of another hike in January.”
Momma’s remarks are likely to fuel the recalibration of views among BOJ watchers on the likely path of interest rates following Wednesday’s hawkish signals as the central bank raised borrowing costs for the second time this year.
The BOJ’s basic stance now seems to be that as real rates are extremely low, they can keep raising them as long as no major shock hits the economy, Momma said. The policy rate is now 0.25%, still well under the most recent core inflation level of 2.6%.
“This is a huge change,” said Momma, currently executive economist at Mizuho Research & Technologies. “This is because of the weak yen and spread of wage growth. I myself have had to significantly adjust my view.”
Up until Wednesday, the BOJ had highlighted a high degree of uncertainty over its forecasts for the economy and inflation in a sign of its cautiousness about pushing up rates.
In the latest report, the BOJ ditched that language and said: “given that real interest rates are at significantly low levels, if the aforementioned outlook for economic activity and prices will be realized, the bank will accordingly continue to raise the policy interest rate.”
The yen climbed to a four-month high against the dollar Thursday and stocks tumbled following the BOJ’s hawkish shift. The currency has been on a roller coaster ride since last month after hitting a 38-year low, fueling concerns that it would keep inflation elevated for households and small businesses via higher import costs.
Leading up to the July policy meeting, senior lawmakers called on the BOJ to tighten monetary policy to counter the yen and cool inflation, a rare move for politicians who generally prefer easy policy settings.
“Naturally, those political calls were on the mind of the BOJ as part of the impact of the weak yen,” Momma said. “After all, the BOJ is supposed to share views with the government by law. It can’t just do what it wants.”
The BOJ’s views on wage gains and the potential upside inflation risks due to a weak yen are reasonable, according to Momma. But that still doesn’t mean the economy and inflation will play out in line with their forecasts, Momma said.
“Uncertainties are still pretty high for factors including service prices and consumer spending, and whether they will pick up,” Momma said. “The BOJ will probably raise rates in October, but whether they can follow that by moving again in January and then April — that depends on the economy.”
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