The BOJ signaled groundwork for a December rate hike, but uncertainty remains over the natural interest rate. The precise path of policy rates will depend on forthcoming economic data.
The BOJ was reported to have effectively laid the groundwork for a December rate hike, but the extent of further increases in borrowing costs after they approach the neutral range remains unclear. With inflationary pressures becoming entrenched, the focus is on how much of the funding burden on households and businesses can be absorbed without undermining the fragile economic recovery.
The BOJ Governor indicated a willingness to defer a rate hike to assess economic and price developments for somewhat longer, while also signaling the possibility of raising the policy rate to 1.5% in December. The BOJ is reportedly set to continue discussions while monitoring price risks ahead, including at the upcoming meeting.
The Japanese economy grew at an annualized rate of 1.4% in the second quarter, with corporate spending increasing despite headwinds from the conflict in the Middle East. September core inflation reached 2.1% year on year, exceeding the BOJ's 2% target. Price pressures were observed to have outweighed the disinflationary effect of reduced fuel subsidies.
Uncertainty over the BOJ's natural interest rate partly explains its policy of steady rate hikes. BOJ staff estimates put the nominal natural interest rate between 1.1% and 2.5%, providing a guide to how far borrowing costs can be raised, but it is difficult to measure and varies considerably between models. This creates uncertainty in assessing the relationship between price pressures and borrowing costs.