Bank of Japan board member Seiji Adachi said on Wednesday that the bank might raise interest rates if sharp declines in the yen lead to increased inflation.
In a speech, Adachi stated that while short-term currency movements alone would not lead to a policy shift, the central bank might raise interest rates if the yen continues to fall. He also said that the Bank of Japan should consider not only the downside risks to the economy and prices but also the upside risks in policy guidance.
Adachi said, “We must by all means avoid raising interest rates prematurely. However, by focusing too much on negative risks, we could see inflation accelerating in a way that forces us to tighten monetary policy sharply later on.” These remarks highlight the growing importance that a weak yen could have on the timing of the next rate hike from the Bank of Japan, which some analysts say could happen in July.
Adachi said that consumer price inflation would accelerate again from summer to autumn this year due to rising import costs. He also added in a press conference after delivering a speech to business leaders in Kumamoto, southern Japan, that ideally, the Bank of Japan would raise interest rates “at a slow pace” in line with steady increases in core inflation.
The yen has dropped about 10% against the dollar so far this year, despite the Bank of Japan’s decision in March to end eight years of negative interest rates, with markets focusing on the still-large disparity between interest rates in the United States and Japan. The yen’s weakness has become a nuisance for policymakers concerned about the impact of rising import costs on consumption, prompting some market players to bet on a near-term rate hike to slow the currency’s decline.
A survey conducted by the Japanese Cabinet Office on Wednesday showed that consumer sentiment in Japan worsened for the second consecutive month in May, as rising prices affected households. Expectations of a near-term rate hike helped lift the yield on Japanese 10-year government bonds to 1.07% on Wednesday, the highest level since December 2011.
Some traders are also betting that the Bank of Japan might decide on a full-scale reduction in bond purchases next month, after surprising markets with an unscheduled cut in bond buying on May 13.
