BOJ may hike rates if sustained wage growth looks likely-government panellist By Reuters

By Leika Kihara and Takahiko Wada

TOKYO (Reuters) – The Bank of Japan (BOJ) may raise short-term interest rates early next year if sustained wage growth becomes a real prospect, Tsutomu Watanabe, an academic who participated in a key government panel on economic policy, told Reuters.

Inflation will remain elevated as companies become more convinced that they can hike prices without scaring away consumers, said Watanabe, a former BOJ official and an expert on Japan’s price trends.

“Talking to firms and looking at various data, it’s hard to see inflation slow ahead,” Watanabe said in an interview on Tuesday. “Japan is already seeing budding signs of sustained, domestic demand-driven inflation.”

His projection contrasts with the BOJ’s view that inflation, which is now well above its 2% target, will slow back below that level later this year as the boost from past rises in import costs dissipate.

Despite prospects of rising inflation, the BOJ must maintain ultra-loose policy for now given uncertainty on whether firms would continue to raise pay next year, he said.

“It’s important that a virtuous cycle of durable inflation and wage growth becomes embedded in society. Once that happens, the BOJ can normalise monetary policy,” Watanabe said.

Before raising short-term rates, the BOJ must dismantle yield curve control (YCC) by removing a 0% target set for the 10-year bond yield, he said.

“Controlling the shape of the yield curve with two rate targets has proved difficult when global market forces put upward pressure on bond yields,” Watanabe said, adding that YCC must be abandoned as soon as possible.

Once the 10-year yield target is removed, the BOJ can raise short-term rates to positive territory, he added.

“If the BOJ sees prospects of sustained wage growth, it may raise short-term rates early next year,” he said.

Under YCC, the BOJ sets a short-term rate target at -0.1% and guides the 10-year bond yield around 0%.

Japanese firms offered wage hikes not seen in the past three decades at this year’s negotiation with unions, as they faced pressure to compensate employees for the rising cost of living.

Markets are rife with speculation that new BOJ governor Kazuo Ueda will gradually dismantle his predecessor’s massive stimulus including YCC, which has drawn criticism for distorting bond market pricing and triggering…