BOJ Deputy Signals More Room to Hike Given Negative Real Rates

Bank of Japan (BOJ) Deputy Governor Ryozo Himino has hinted at the possibility of further interest rate hikes, given the current negative real rates. In a recent speech, Himino suggested that there is still room for the BOJ to raise rates, as real interest rates remain negative despite the central bank's recent hikes. This signals a more hawkish stance from the BOJ, which has been gradually tightening its monetary policy in response to rising inflation.

The BOJ has been grappling with inflationary pressures, with consumer prices rising at an annual pace of 3.7% in December 2024, well above the central bank's 2% target. The BOJ has raised its key policy rate twice in the past year, from -0.1% to 0.5%, but real interest rates remain negative due to high inflation expectations. This has led some BOJ officials to suggest that more rate hikes may be necessary to bring real rates back into positive territory.

Himino's comments come as the BOJ is expected to raise its policy rate again in its upcoming meeting, with markets pricing in a 70% chance of a 25 basis point hike. However, some analysts have expressed concerns that the BOJ may be moving too quickly, risking a slowdown in economic growth. The Japanese economy has been recovering from the COVID-19 pandemic, but growth remains sluggish, with GDP expanding by just 0.9% in the fourth quarter of 2024.

Himino's comments have been welcomed by some market participants, who see the BOJ's hawkish stance as a sign of confidence in the economy's ability to withstand higher interest rates. However, others have expressed concerns that the BOJ may be underestimating the potential impact of rate hikes on economic growth and household consumption.

"The BOJ seems to be underestimating the potential impact of rate hikes on household consumption," said one analyst. "With wage growth slowing and inflation expectations still high, consumers may not be as resilient as the BOJ expects."

As the BOJ continues to grapple with inflation and economic growth, investors will be closely watching the central bank's policy decisions and the evolving economic data. The BOJ's ability to balance its monetary policy to support economic growth while addressing inflationary pressures will be crucial in determining the trajectory of the Japanese economy in the coming months.