BOJ to Opt for Modest Rate Hike Amid Contained Price Pressures

The Bank of Japan (BOJ) is considering a modest rate hike to avoid shocking markets and allow time for scrutiny of higher rates' impact on corporate and household activity. The consensus view points to a conventional 25 bps increase to 1.25% next week, but investors are asking if the BOJ will lift rates by 50 basis points (bps).

Last time Japan's central bank lifted its main policy rate half a percentage point in 1989, prices were hot and the land under the Imperial Palace was worth more than California's real estate. However, current price pressures are contained, and the BOJ has little appetite for delivering a bigger-than-usual hike this month.

BOJ Governor Kazuo Ueda said economic and price conditions are moving roughly in line with projections, suggesting inflation risks have not heightened enough to justify a bigger-than-usual hike. The yen's jump to a seven-month high around 153 per US dollar has also taken some pressure off the BOJ to lift the currency with a big hike.

BOJ executives have stressed the need for vigilance about the impact of past rate hikes on bank lending, given uncertainty on how the public could react to higher rates after decades of ultra-loose monetary policy. The economy is hardly in need of aggressive monetary tightening aimed at cooling red-hot demand, and there are scant signs of an alarming spiral of soaring prices and wages.