Rate hikes on the horizon?

Many in the financial community had expected the BOJ to pull the trigger on a rate hike at its late August meeting. But with the turmoil in the global financial markets, the central bank held steady.

Although inflation is not a problem, the Japanese economy has been growing strongly and the BOJ is thought to want to “normalize” monetary policy levels. Looking at recent inflation data, Japan’s core consumer prices fell 0.1 percent year over year in June, unchanged from the prior month.

With an upcoming meeting on Sept. 18- 19, most analysts expect the central bank to remain on hold. However, many expect at least one 0.25 basis-point rate hike by yearend, perhaps at the October or December meetings. Given the extremely low overnight rate in Japan, if its economy were to slow down in coming months, the BOJ would not have many tools with which to stimulate the economy, which is one factor behind the BOJ’s desire to normalize monetary policy and push rates higher, despite the lack of inflation.

However, some market watchers voice concerns about potential rate hikes.

“There is absolutely no economic justification to raise rates,” says Tony Hughes, managing director at Moody’s Economy.com. “There is absolutely no evidence that we ever saw the end of deflation.”

Some economists have warned that premature BOJ rate hikes could slow growth.