(Bloomberg) -- The Bank of Japan may hike interest rates faster than many currently anticipate and it should strive to better telegraph those moves to ensure markets don’t panic, according to a former official.
“Rate hikes could be faster than everyone expects,” said Tsutomu Watanabe, the former official and an economics professor at the University of Tokyo. “Two more moves this year are possible,” he said.
A disconnect between the BOJ’s rationale for its July 31 hike and price trends at the time indicates authorities are intent on lifting rates in order to create a policy buffer against potential downturns and normalize settings as soon as possible, said Watanabe, who is one of Japan’s top inflation experts.
Watanabe, who was among shortlisted candidates to become BOJ governor when the position became vacant last year, said the BOJ’s key assertion that inflation was “on track” with its view, even though the price trend wasn’t strengthening, means the central bank could essentially move whenever it wants.
“It’s in the BOJ’s DNA to create positive rates, and I probably have that DNA, too, as a former official,” Watanabe said. “It’s not groundless to raise rates in order to make room to respond in case of negative economic shocks, but they should telegraph that intention.”
The BOJ was seen as having contributed to the global market meltdown in early August after its 0.25% hike and some clearly hawkish signals conveyed at the post-decision press conference. Japan’s stocks tumbled by the most on record, outpacing declines among its peers, as the unwinding of yen-carry trades spurred an exodus from risk assets.
Ahead of that rate decision, Watanabe thought there was “absolutely” no chance of a move, as data were signaling consumer spending remained fragile due to sticky inflation. Watanabe sees that the central bank raised rates partly to stay in line with market pricing of its rate path, but the BOJ should be more active in communicating its own view for the rate path.
One option to enhance communications would be for the BOJ to compile something similar to the dot plot that the Federal Reserve releases every quarter. Even if the outlook turned out to be incorrect, the BOJ wouldn’t lose credibility, Watanabe said.
Speaking at an unusual parliamentary hearing following the market turmoil last month, Governor Kazuo Ueda said the bank will continue to raise rates if its inflation outlook is realized. That message was reinforced by remarks from deputy chief Ryozo Himino and board member Hajime Takata in the past week.
All three officials also indicated they won’t rush to raise rates, stressing the need to monitor financial markets that remain unstable.
While almost no economists expect the BOJ to adjust its benchmark rate when the board’s next two-day gathering concludes on Sept. 20, many BOJ watchers expect another rate hike by January.
Even if the BOJ were to raise borrowing costs every quarter, it wouldn’t break the economy, as wage growth and inflation aren’t being generated by the BOJ’s easy monetary settings, he said.
“Even if the rate goes up to 1%, I don’t think it will create big problems for wages and inflation,” Watanabe said. “What happens at spring wage talks next year is much more important than what the BOJ does.”
(Updates with board member map)
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