Bank of Japan set to raise rates to 31-year high, vow further increases

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TOKYO, June 16 : The Bank of Japan is set to raise interest rates to a 31-year high on Tuesday, marking another landmark step in normalising monetary policy as it focuses on taming price pressures from the energy shock caused by the Iran war.

The hike would be the first since December and align the BOJ with other central banks shifting towards tighter policy to combat inflation, including the European Central Bank.

All eyes will be on how the peace deal between the U.S. and Iran, which could ease global inflationary pressures, affects the BOJ's communication on the pace and timing of further interest rate hikes.

Deputy Governor Shinichi Uchida will hold a press briefing after the meeting, which Ueda will miss for a two-week treatment in hospital for an infected liver cyst. Ueda will not vote, leaving the decision in the hands of eight board members - seen mostly in favour of a rate hike.

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Uchida is likely to reiterate the BOJ's resolve to continue raising rates, but avoid giving explicit hints on the next rate-hike timing given lingering uncertainty over the Middle East, the central bank's former top economist Seisaku Kameda said.

"Uchida is good at communicating with constructive ambiguity. With so much uncertainty over the outlook, he will signal the BOJ's readiness to respond nimbly," Kameda said, predicting a hike in June and then another in October-December.

WEAK YEN PRESSURE

At the two-day meeting ending on Tuesday, the BOJ is widely expected to raise its short-term policy rate to 1 per cent from 0.75 per cent, taking borrowing costs to levels unseen since 1995.

A hike to 1 per cent would bring the BOJ's policy rate around the bottom of its estimated nominal 1.1 per cent-2.5 per cent range seen as levels deemed neutral to the economy - reason to tread cautiously.

"We strongly hope the BOJ communicates and works closely with the government" in seeking to stably hit its price goal, Economic Revitalisation Minister Minoru Kiuchi told a news briefing on Tuesday.

Known as an advocate of loose fiscal and monetary policy, Kiuchi said he will attend Tuesday's meeting as among the two government representatives who cannot vote, but express views, to the board.

The Middle East conflict has complicated the BOJ's policy path by adding inflationary pressure through higher oil costs, while hurting an economy heavily reliant on imported fuel.

The BOJ kept policy steady at its previous meeting in April but sharply revised up its price forecasts and stressed its vigilance to the risk of an inflation overshoot. Three of its nine board members proposed a hike to 1 per cent.

A flurry of hawkish BOJ signals since then have led markets to almost fully price in the chance of a June rate increase. A Reuters poll showed economists projecting the BOJ to raise rates to 1.25 per cent in the fourth quarter after a hike in June to 1 per cent.

While government subsidies have kept core consumer inflation below the BOJ's 2 per cent target, analysts expect price pressures to broaden with wholesale inflation spiking to a 3-year high of 6.3 per cent in May.

A weak yen, which pushes up import prices and broader inflation, will also keep the BOJ under pressure to stay on course for further rate hikes, analysts say.

"There's still a lot of uncertainty on how the Iran peace deal could affect oil prices and domestic inflation," said Tetsuya Inoue, executive economist at Sony Financial Group.

"I also wonder whether Japan's economy is strong enough to weather faster rate hikes, given the BOJ's policy rate will be approaching levels deemed neutral to the economy," he said.

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