Takatoshi Ito, a Columbia University professor and eminent Japanese economist is not completely ruling out another Bank of Japan rate hike at its meeting this week. Calmer financial markets, and the yen’s ability to trade at much stronger levels than it did earlier in the year give BOJ policy makers the ability to open that door should they choose to do so. But he’s not betting on it either as policy makers wait for more evidence inflation will remain anchored at or above 2%. And as they are still wary of making any policy moves that could cause upheaval in the Japanese stock market as their surprise rate hike did in July.
HAYS
What do you see for the BoJ? Are they going to signal something important without doing anything important? What do you expect?
ITO
Well, they had some rough days after the July meeting, And it was mostly due to US employment report rather than BOJ decision, but it was coincided. And there was some scary moment on the Monday after the decision was made and employment report came on Friday.
So I think they are quite nervous on the market turmoil. In the medium run, they would like to proceed with the normalization, which refers to the raising the interest rate. So the many people, including myself, think that there will be another rate hike or two this year, and so that leaves this meeting and October meeting and December meeting. So that's a question right now in Tokyo.
HAYS
Okay, so I want to get back to all that, the stock market eruption that started in the U.S., went very, very harsh in Tokyo for a day or two in Japan, and the Nikkei, etc.
Now, I want to get right to this, the big event you and I just were tracking which is the Federal Reserve Meeting. The big question was, would they cut the key rate by 25 basis points or 50? In fact, they did go ahead and offer this larger rate cut.
So is this going to have any impact? In what way? We don't need to discuss what the Fed's done and why. But in terms of the Bank of Japan, when they, you know, wrap up their meeting tomorrow and decide what they're, even if they're not going to do anything to hike their key rate again, what they're going to message, will this change anything? What door will it open or shut?
ITO
Now, the spillovers from the U .S. comes in two channels. One is the exchange rate, the other is the stock prices. And I think there was a one -yen jump after the Federal Reserve announcement. And stock price is probably steady and not so much reacting.
So probably this will carry over in the next day or two. And so the BOJ I don't think is anyway constrained or encouraged from the US, what's happening in U .S.
I think they have the free hand whether to raise or not to raise the policy rate.
HAYS
So if the weakness of the yen ever since Governor Ueda took over in April of last year and then towards the end of the year, in the beginning of this year, we had the weaker, weaker, weaker yen. The yen gets stronger and longer, does that just make it easier for them to go ahead and hike the rate, or do you expect that to just get rid of an issue that they've been worried about in the past, not so much lately, but this whole question of the yen's volatility?
ITO
The pressure on BOJ to do something basically raised an interest rate to defend the yen, or to stop the yen depreciation, was mounting in April, May, around that time. That was the moment that they had really strong pressure.
That right after the, or the during that Yen went to 160. So from June to July, there were days that Yen was weaker than the 160 mark. And that was, that prompted the minister of finance, minister of finance interventions. And I would say interventions were effective and that yen turned around from the peak of 161 yen per dollar and it was, you know, on the way to to appreciate and in July meeting July 31st after the BoJ rate hike, it went to 150, 151.
So that was sort of, you know, basically responded, the BoJ's action was welcomed from those who thought Yen was to depreciate it. And 150 still is rather are depreciated compared to the what we used to have.
But since the July meeting, the exchange rate continued to move toward the end appreciation. And today, I think after one year and jump after the FRB announcement, it's like 141. So it's getting to more comfortable, so approaching to the comfortable zone. So BOJ is not compelled or pressured to act to raise interest rate for the exchange rate reasons.
So they have more, more, I think, freedom to make decisions independent from the exchange rate. And this is good news for the Bank of Japan.
HAYS
So what about the key factors that are in place right now that suggest to so many people that no, it's not quite time for another rate hike, although you do are looking for, you also I should say, looking for further hikes, at least one hike, maybe two more this year. So let's start with inflation, because that has been such a key factor to determine whether or not that it is time for the BOJ I should say to get ready for that next hike or not.
Is inflation saying strong enough, is it expected to stay strong enough for the BOJ for Governor Ueda and his team to confidently move ahead?
ITO
So on inflation, if you take the headline or the core, it is above 2%. It has been gradually declining from peak or full percent to a current 2 % plus. And the core core, which exclude energy and fresh food, both energy and fresh food, the core core inflation rate is actually below 2%, slightly below 2%, 1 .9%. So in that sense that I think the inflation rate is around 2%.
And that is obviously the target. So there is no compelling reason that interest rate should be go up or down if you just look at the inflation rate.
But the BOJ is looking at not just current inflation rate, but what inflation rate will be in the future. So the forecast is important. Underlying inflation rate is important. Wages, consumption, all other variables which will influence the inflation rate down the road in the next several months, that's the important thing.
So when BOJ says if the data are on track, they want to continue normalization. Data, they are looking at all those macro variables, not just inflation rates. So that makes things harder to forecast what the BOJ would do because that will be inside the BOJ micro forecasting model.
And so it's very hard to say that actual current inflation rate being close to 2 % doesn't mean that interest rates should go up or down. And it's much more important where the consumption is coming up as predicted, where wage continues to be high.
And one more key factor is inflation expectation. And in the US inflation expectation has been anchored even through the COVID and the 8 % inflation anchored at 2%, anchored around 2%. And that is actually was a factor that the FRB had an advantage, that expectation was anchored. In Japan, it was anchored at zero, and it is coming up in the last three years or two years, coming up from 0 .5 to 1 to 1 .5, and now closer to 2%. So what BOJ has to do is to support the 2 % inflation rate,
The actual inflation rate coming down, and the inflation expectation coming up from below, and bang, you have to make the convergence at 2 % actual inflation rate from above and inflation expectation from below.
So that's really a very difficult task, which BOJ has compared to the United States, where inflation expectations are going to 2%.
HAYS
Well, Taka, inflation expectations, of course, they often depend a lot on wage increases, on expectations for wage increases on the strength of the economy.
Now, with the strength of the economy, the recent quarterly number was a nice rebound from the previous negative quarter. Consumption, maybe there's some brighter signs there. How do you see growth? How do you see wages? How do you see all that fueling Japanese workers to continue to expect their wages to rise at what have been recently, some pretty healthy rates.
ITO
So wages were helped by a Shunto - and it was like a 5 % increase in the spring.
HAYS - Of course, it's a spring wage negotiation.
ITO
Yeah, and another round is next year. So we don't have the new information between now and next spring. And we are seeing more, I think BOJ is watching more on the consumption, the wage hike, that's wage hike, translate into the consumption, healthy consumption increase. And they're still looking for the firm consumption data to come up.
And also the wages, I think the wage negotiation, the Shunto is for the big businesses, but the non -regular workers or part -time workers, they are more getting wage that demand and supply decides. And there have been higher wage increase for those non -regular workers. whether that translate into higher consumption - that's the key variables that they are watching.
We don't have any definite conclusion on whether those consumption is getting a boom or consumption is faltering. We don't have the evidence, but I think they, they, the BOJ is still thinking that data are on track and that means that they would like to continue hiking in interest rate.
HAYS
Question is whether this week or October or December. Okay, what about messaging from the BOJ itself? There's one of the board members Nakagawa,who has recently sounded very hawkish, you know, rates need to keep rising, maybe get to 1 % this year, I think as well think that could happen.
So in terms of the possibility, again, is there any chance, any reason why the BOJ would surprise again? I mean, you just mentioned how unsettled financial markets for after the July rate hike, which came very unexpectedly. And then on top of the week jobs reports and concerns about the US, et cetera, et cetera. Is there any chance they could do something like that again tomorrow when they reach that decision?
ITO
- It's interesting that you mentioned both members' speeches. And there was another one which sounded a bit hawkish . So there were two sort of consecutive board members' speeches, which sounded like a hawkish, or they would say it's not hawkish, it's all the lines that they're continuing from March. There are no changes,they would say. They have been saying, you know, they want to normalize as long as the data are on track. They're repeating that mantra. And they would say it's on the market side, whether it's the markets’ interpretation on the dovish side or the hawkish side. But you're right, that I think the market is now feeling that maybe,maybe there is a rate rate hike this week. And I think the key is that how the market, Japanese market reacts tomorrow, today, in Japanese time, more from New York time. And whether that is calm, then why not? And so without watching, I think overnight, their time, overnight development in the New York market,
I mean, exchange rates, stock prices, and other variables.
HAYS
So let's dig deeper in that. I wanna make sure that I'm understanding at your point here, the Fed just did this rate cut, right? 50 basis points, signaled more rate cuts coming, maybe another 75 basis points worth of them by the end of the year. So that's a big force now, right? That's where there's no question about that pretty much, unless the data don't cooperate, but it sounds like Chair Powell's ready to go in that direction. So what kind of reaction will the BOJ be watching? What could signal to them and to the Hawks anyway, gee, maybe this is an opportunity. Maybe we should just go ahead and do another surprise rate hike.
ITO
No, I think there are two sides. I think the yen definitely appreciates or appreciated and I think continue to appreciate. Okay, so the that is, that would put a break on the BOJ rate hike if they are worried, but too much, too fast in appreciation could derail the recovery, especially on the exporter's side. If that consideration is strong, they want to skip this time and wait another month.
But the other argument could be that if there is not much reaction in the stock market, so the US economic data, then probably Japanese stock market, stock prices, will not react too much to the exchange rate. And so that they can continue saying that data on track.
So I think they're quite closely watching what's happening their time overnight in New York and daytime on the first day of the meeting. And if there are, if there is a turmoil, I'm sure they will not do anything. But what if it's calm? And then they have the option.
HAYS
And you think there's a genuine chance that they could walk through the rate hike door today at the Bank of Japan?
ITO
Yeah, there is always a possibility. But many people bet that it won't be this time?
HAYS
Well, we know then that the messaging is going to be very important. We know that at the press conference following the meeting, Governor Oeda is going to get hit with all kinds of these similar questions.
What do you think the key message is he'll want to send? Or do we just have to wait and see how much he says signals, "Oh yeah, we're ready to hike rates again as soon as we can." He wouldn't say it quite like that, or trying to pick up if he signals a little bit of hesitancy, particularly since the memory of all that market breakdown in the Nikkei and yen carry trade exploding, all of that is still so fresh in everybody's memories.
ITO
Yeah, so after that Monday, 4 ,000 decline (in Nikkei), a record breaking decline. Two days after that, the deputy governor said there will be no rate hike as long as the market is in turmoil. So the first question the you or other reporters should ask in the press conference would be what is the definition of turmoil.
If this week is in turmoil and that will make things, you know, whether that condition is removed and free to make a hike.
And other questions you could ask, but my guess is that he will repeat the mantra that we'd like to, we means BOJ, would like to continue normalization as long as the data on track.
But, you know, it doesn't mean, you know, the rate hike every meeting. You know, carefully watching the data. So they will not probably, they do not want to say one way or the other, but they, all they want to send signal is that they would like to continue normalization, which is rate hike, as long as the data are on track. But when the timing that they want to have the freedom. -
HAYS
Is There another reason to avoid doing anything right now, the fact that the LDP ruling party elections are happening very soon, and then following with that maybe a national election. Is that, would that be another reason to say, if nothing's pushing us to move right now, just sit back, or is that a very much a background you now because the whoever becomes the winner of this elections in Japan, the Bank of Japan is not one of their major issues right now. This is, the BOJ can just stay on track and do what it wants to do and not be too concerned about politics surrounding it.
ITO
Right, so some of the candidates actually said that BOJ should raise the interest rate to stop the end depreciation. But that was the time that yen was 155 or something.So that is all removed. Now, so you're right that I think at this moment that no candidate is saying anything about BOJ or BOJ policy.
And I think several have mentioned that they will they will honor r the independence of the Bank of Japan. So I don't think there is any political constraints or political consideration that BOJ has to think seriously. I think it's much more on the media side that they you know they think that they do not want to change the policy when there is an election. And, but I don't know. I don't think that's the rather secondary issue. If as long as they can explain from economics and financial markets, they can do it. -
HAYS
So you said you think that ultimately this year, the key rate, the key policy rate gets up to 1%. Over time, do you expect it to go much higher? And what is that going to mean for the Japanese economy?
ITO
Yeah, again, so it's, you know, the economy has to absorb those rate hike, but you know, consider that this rate hike is possible when inflation rate is anchored, inflation rate and inflation expectations anchored at 2%.
So, you know, if it's 2%, then, you know, what is the neutral rate? Could neutral rate to be that deep in the negative territory? Probably not. 1 % is, at least they can go to 1%, which means negative real rate of 1%, which is quite the stimulator. So I think the 2 % inflation target regime is established, the stains, then they want to go higher than 1%.
But again, you have to, that is provided that 2 % inflation target is maintained. So they want to go slowly to see that is, that is still the case. So, you know, I think the board members and, and governor, both all of them said 1 % as the sort of let's say intermediate target of the rate hike and whether they want to achieve by December or the March next year, the end of calendar year or end of fiscal year, I don't know, but that's the sort of intermediate timing of that 1 % to be achieved.
HAYS
How would, how do you assess Governor Ueda's progress, his success, what he's done since he took over the role of Governor of the Bank of Japan?
ITO He's my good friend. I passed that.
HAYS You passed that. Okay. Okay. Well, so I guess my final question would be in terms of inflation,
DO you have any doubt that it's going to sustain and expectations are going to stay around 2 %? Is that deflationary psychology that former Bank of Japan governor Kurota used to always be talking about, you have to defeat that, you have to get past that? Is there anything that makes you doubt that it isn't completely vanquished?
ITO
I think that sort of the zero inflation, zero inflation expectation, zero wage increase, that kind of zero, zero, zero equilibrium has been broken. And it was broken first from the supply side, the energy prices and depreciation. But I think, you know, many people expect that prices are going up and that is normal as long as wages are going up more than 2%.
And just in that sense, you know, the psychology expectation has changed. And I think there is a good chance, good chance that this 2 percent inflation target, which was elusive for 10 years, is now in the hands of the BOJ.
Takatoshi Ito is one of Japan premier economists. A professor at the prestigious University of Tokyo, he is the author or co-author of several books on the Japanese and global economy. He served in the Japanese government as Deputy Vice Minister for International Finance in the Ministry of Finance and was a member of Japan’s Council on Economic and Fiscal Policy. He has been a senior advisor in the research department of the International Monetary Fund and has taught at Harvard University and the University of Minnesota.
Ito Sees One or Two More BOJ Rate Hikes This Year as Normalization Continues