A December Hike in Rate?

The other day Mr. or Ms. anonymous asked me, "Do you think the Bank of Japan will raise rates in December?"

My answer to such a question is as follows: Tomorrow never knows. However it is more likely that BOJ will raise the interest rate before the end of the year. Here's the relevant excerpt:

Half of economists see BOJ's next rate hike by January: survey
Jiji Press, October 13, 2006

Half of the private-sector economists polled by a government affiliate expect the Bank of Japan to carry out another interest rate increase by January next year, according to the survey results released Thursday. The Economic Planning Association, affiliated with the Cabinet Office, surveyed 34 economists at private-sector financial institutions. Of them, 17 predicted the next rate hike by the central bank would come by January.

The BOJ raised its unsecured overnight call rate target in July to around 0.25 percent from almost zero percent, its first credit-tightening step since August 2000.

Of those surveyed, nine foresee the BOJ's next move coming in December this year, while five each predict the rate hike taking place in January and February next year. The earliest forecast was for November this year, backed by three of the economists.

Another excerpt:

Central bank won't decide monetary policy on consumer prices alone
Mainichi Shimbun, October 5, 2006

The Bank of Japan won't set monetary policy based on consumer prices alone, a senior bank official said Thursday."Consumer prices are important data, but we will not determine monetary policy on that alone," said Bank of Japan Deputy Governor Toshiro Muto.

"We are closely watching developments of the economy and other movements," told reporters in Kyoto, after meeting regional business leaders there. Muto also said he does not have any preconceptions about when to raise the benchmark interest rate, now at 0.25 percent.

....With prices inching up after years of deflation, analysts have been speculating about when the Bank of Japan will next raise rates. Japan's core consumer price index, which excludes volatile fresh food prices, rose 0.3 percent in August, the third monthly gain under a new, revised calculation method. Under the old system, it would have been the 10th consecutive monthly increase.

Actually Toshihiko Fukui, Governer of BOJ, told the press that BOJ would not keep the rates at the present level. Mr. Fukui didn't deny that BOJ would raise the rate. This Fukui's statement will have some influence on the people's expectation and thus the next development of the Japanese economy: Not denying a hike in the rate seems to be no better than a would-be hike. That is, it makes many people think that BOJ wants to raise the interest rate some day in the future. And the economy is likely to be shrinked by Fukui's prediction.

In fact, of those surveyed, nine economists foresee the BOJ's next move coming in December. Their conjecture will also make the people think of the next hike in the rate and thus the economy will be influenced by itself. I think Mr. Fukui knows that his policy change affects not only the economy itself but also the people's expectation on the next situation of the economy. From this viewpoint, Mr.Fukui seems to aim for a next hike in the rate. He is sure to want to raise it within the year. In any case, there will be a hike in the future.