Japan likely to raise policy rate this month…"Surpasses 0.5% barrier for the first time in 30 years"

Bank of Japan Monetary Policy Meeting on the 18th–19th

Policy rate likely to be raised 0.25%P to 0.75%

Likely to exceed 0.5% for the first time in 30 years since 1995

The Bank of Japan is forecast to raise the policy rate this month to an annual 0.75%. If the policy rate rises to an annual 0.75%, it would be the highest level in 30 years.

On the 14th, according to the Nihon Keizai Shimbun and others, the Bank of Japan is likely to raise the policy rate, currently an annual 0.5%, by 0.25% percentage points at the Monetary Policy Meeting on the 18th–19th. When Japan's bubble economy collapsed in the 1990s, the Bank of Japan lowered the equilibrium interest rate corresponding to the policy rate from an annual 1.0% to an annual 0.5% in September 1995. It would be the first time since then that the policy rate exceeds an annual 0.5%.

Earlier, Kazuo Ueda, Governor of the Bank of Japan, and other executives indicated they intended to submit a proposal to raise the policy rate. The Nihon Keizai Shimbun predicted that more than half of the nine policy board members would support a policy rate increase. There are no policy board members known to be clearly opposed to a policy rate increase. A proposal to raise the policy rate is approved if a majority supports it.

If the Bank of Japan raises the policy rate this month, it would be the first time in 11 months since January this year. The Bank of Japan ended its negative interest rate policy in March last year for the first time in 17 years. In July last year it raised the policy rate to an annual 0.25%, and in January this year to an annual 0.5%. Thereafter, considering factors such as the Trump administration's tariff policies, it kept the policy rate unchanged for six consecutive times until October.

Within the Bank of Japan recently, the view has spread that the impact of Trump's tariffs on the economy and prices is not as large as expected. Although they dealt a blow to industries such as the automobile sector, the view that the negative impact on corporate profits will be smaller than initially expected gained traction. The expectation that wage growth, which exceeded 5% last year and this year respectively, will continue next year also supported a policy rate increase.

Governor Ueda hinted at the possibility of a policy rate increase this month, saying that the real interest rate adjusted for inflation remains low. On the 1st he explained, "Even if we raise the policy rate, it is an adjustment within an accommodative financial environment," saying, "It is not putting the brakes on the economy."

The recent yen–dollar exchange rate hovering around 155 yen to the dollar and continued yen weakness also bolster the view that the Bank of Japan will raise the policy rate. Yen weakness raises import prices and acts as a factor in pushing up consumer prices. The Bank of Japan's intention is to put the brakes on yen weakness by raising the policy rate.

The Sanae Takaichi administration, which seeks to curb inflation, is also reported to likely tolerate a policy rate increase. The October consumer price index (excluding fresh food) rose 3.0% year-on-year. The consumer price inflation rate has exceeded the Bank of Japan's 2% target for 3 years and 7 months in a row.

The market is paying attention to the future pace of policy rate increases and the terminal rate. The Asahi Shimbun observed, "The terminal criterion is the 'neutral rate' that neither overheats nor cools the economy." The Bank of Japan sets the neutral rate at an annual 1.0–2.5%. Even if the policy rate is raised this time, it would remain below the lower bound of the neutral rate, an annual 1%, so there is a strong view that an additional 0.25% percentage-point increase next year is likely.

The key question is whether a policy rate increase will cause market turmoil such as a sharp stock market plunge or a rapid appreciation of the yen. When the Bank of Japan raised the policy rate in July last year and U.S. recession concerns coincided, large-scale unwinding of yen carry trades occurred in August, which caused a 'Black Monday' shock in global markets.

Tokyo = Correspondent Kim Il-gyu black0419@hankyung.com