Bank of Japan hints at near-term rate hike, pushing yields higher
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Bank of Japan Governor Kazuo Ueda hints at a near-term rate hike as bumper pay hikes push up prices, driving two-year Japanese bond yields to their highest in more than a decade. Ueda mentions that if currency moves significantly drive inflation and wages, the central bank could respond with monetary policy, suggesting that sharp yen falls could affect the timing of the next rate hike. Japanese Finance Minister Shunichi Suzuki also warns about excessive yen falls. The BOJ expects inflation to pick up from summer towards autumn as wage increases begin to give households purchasing power. The BOJ's conviction is that rising wages and inflation will help make the case for hiking short-term rates from the current 0-0.1 percent level as soon as July. The BOJ releases fresh quarterly growth and inflation forecasts at its next meeting in April 25-26. A Reuters poll shows more than half of economists expecting another rate hike this year, with October-December the most popular bet on the timing. Japanese firms agreed to raise wages 5.24 percent this year, the highest increase in 33 years. The BOJ says wage hikes are broadening to smaller firms in regional Japan, prodding firms to pass on labor costs through price hikes. However, the weak yen complicates the BOJ's policy path. Ueda signals that exchange-rate developments could serve as a reason to raise interest rates if they push up inflation via higher import costs. The yen has been on a downtrend despite the BOJ's exit from ultra-loose policy, as traders interpret its dovish language as signaling the next rate hike would be some time away.
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