Bank of Japan Review Committee: Interest rate hikes will continue to ensure that the price trend does not exceed 2%

The Zhitong Finance App learned that Bank of Japan Review Committee Kazuyuki Masu (Kazuyuki Masu) said that the Bank of Japan will continue to raise the benchmark interest rate to ensure that the price trend does not exceed 2%. This statement supports the market's general expectation that the Bank of Japan will raise interest rates next week.

Speaking on Thursday, Bank of Japan said, “Given that the current price trend is very close to 2% and the financial environment is still relaxed, the Bank of Japan will continue to raise policy interest rates.” “From now on, the most important thing is to ensure that the underlying inflation rate does not significantly exceed 2%,” he said.

Bank Zeng's remarks indicate that even if policy interest rates are about to enter a lower range of estimated neutral interest rates for the first time in the current interest rate hike cycle, the Bank of Japan will not end its monetary policy tightening as a result. The Bank of Japan estimates a neutral interest rate between 1.1% and 2.5%.

He said, “To complete the normalization of Japan's monetary policy, I am convinced that the Bank of Japan needs to further raise policy interest rates. Only in this way can the policy interest rate fall steadily within the estimated neutral interest rate range, thereby ensuring that the policy interest rate is flexible enough and can be quickly adjusted in any direction according to economic conditions.”

In his speech, Mr. Zeng also pointed out that the war in the Middle East led to an increase in fuel and chemical prices, which in turn boosted the prices of a wider range of commodities. For example, rising transportation costs for imported raw materials and rising costs for imported chemical fertilizers are all factors driving up food prices. He said, “There are concerns that the price increase for these products may not be a temporary shock, but rather represent a more lasting trend and may further drive up the overall price level.” “If inflation accelerates at this stage, then the Bank of Japan may inevitably need to raise interest rates quickly. There are certain risks in this.”

According to people familiar with the matter, the Bank of Japan is inclined to raise the benchmark interest rate by 25 basis points to 1.25% this month to deal with the risk of price increases, while not ruling out the possibility of increasing the pace of interest rate increases thereafter. People familiar with the matter said they still believe that the risk of inflation is biased upward, and that rising service prices and the continued weakness of the yen reinforce the reasons for action.

It is worth mentioning that before the interest rate hike in June, the bank Zeng indicated that action was necessary, thus boosting the market's expectations of the Bank of Japan's interest rate hike. He is also the last Bank of Japan official to speak as planned before next week's Bank of Japan policy meeting.

According to the swap contract, the market expects the probability that the Bank of Japan will choose to raise interest rates at next week's policy meeting to be about 97%. US Treasury Secretary Bessent has repeatedly stated that the Bank of Japan needs to raise interest rates, which has largely boosted the market's expectations.

At the same time, several recently released data have also strengthened the reasons for the Bank of Japan to raise interest rates. According to data released by Japan's Ministry of Health, Labor, and Welfare on Tuesday, Japan's nominal wage rose 4.7% year on year in July, continuing to accelerate from the revised 4% year on year increase in June. This increase was the biggest since 1997, far exceeding economists' forecasts of 3.8%, and surpassed 3% for the sixth month in a row, setting the longest continuous growth record in 34 years.

Meanwhile, a report released by Japan's Cabinet Office on Tuesday showed that Japan's gross domestic product (GDP) for the second quarter increased by 1.4% on an annualized basis over the previous quarter, higher than the initial value of 1.1% previously announced, but lower than the median estimate of 1.8% among economists. After incorporating new data for this period, fixed corporate investment boosted the GDP growth rate. Corporate fixed investment fell 0.9% from the previous quarter, while preliminary data showed a decrease of 1.2%.

Furthermore, data released at the end of August showed that despite measures taken by the Japanese government to reduce energy costs, Tokyo's key inflation indicators accelerated for the third month in a row. Tokyo's consumer price index (CPI), which excludes fresh food, rose 1.8% year on year in August, slightly faster than the 1.7% increase in July, which is in line with the median expectations of economists in the survey. The Tokyo inflation data is generally regarded as an important leading indicator for measuring price trends across Japan. Excluding fresh food and energy, the core CPI rose 2% year over year, while the overall CPI rose 1.9% year over year. The main drivers of inflation include the cost of durable goods for education and entertainment, and medical expenses; rents have risen sharply, and restaurant costs have also risen.

Japan's consumer price index (CPI) excluding fresh food rose 1.8% year on year in July, up 1.8% year on year from 1.6% in January, and accelerated for the second month in a row; core CPI excluding fresh food and energy rose 1.9% year on year, and overall CPI also rose 1.9%; service prices, which are key indicators for measuring the sustainability of inflation, rose 1.2%, slightly accelerating compared to June.