Actual interest rates too low or push the tightening pace to accelerate! JP Morgan bets on the Bank of Japan to raise interest rates again in April next year.

JPMorgan released a research report stating that the minutes of the Bank of Japan's December meeting showed that many members of the monetary policy committee expressed concerns about maintaining significantly negative real interest rates in the long term, and hinted at further rate hikes. However, there was no consensus among members on the pace or timing of future rate hikes. Some members advocated raising rates at the current pace every few months, while others seemed to prefer a gradual approach, adjusting rates according to developments. Overall, the tone of the meeting indicated that concerns about the depreciation of the yen and rising long-term government bond yields, which may have been triggered by delays in adjusting the Bank of Japan's policies, were gradually spreading among the members. The Bank of Japan seems to view raising rates every six months as the baseline scenario, but there is a possibility of taking action earlier depending on market conditions. The bank continues to expect the Bank of Japan to raise rates by 25 basis points in April next year, increasing the policy rate from the current 0.75% to 1%. JPMorgan pointed out that the Bank of Japan's monetary policy decision in December was clearly based on the view that "financial conditions are becoming overly accommodative relative to economic fundamentals. Therefore, waiting until the next meeting (to raise rates again) would bring considerable risks." In fact, almost all opinions regarding real interest rates reflected concerns that the Bank of Japan's policy settings may be too accommodative. For example, one comment stated, "If real interest rates continue to deviate from equilibrium rates, their impact on macro resource allocation may lead to future imbalances, which could then affect sustainable economic growth," and "Japan's real policy rate is currently at the lowest level in the world." This is consistent with the policy stance of continuous rate hikes hinted at by several members. Members pointed out that "it will be necessary in the future to adjust the degree of monetary ease at the appropriate time" and "steadily raising policy rates to avoid falling behind the situation is desirable," indicating the need for further rate hikes. However, there may not yet be a consensus on the pace or timing of rate hikes. One member suggested that the Bank of Japan "should adjust the degree of monetary ease every few months," but most members seem to prefer making decisions through "examining economic activity, prices, and the condition of financial markets." The Bank of Japan's leadership (i.e. the deputy governor of CKH HOLDINGS) did not make any specific comments on this issue. JPMorgan added that this ambiguity in the pace of policy adjustments also extends to views on neutral interest rates. Several members mentioned the difficulty of determining the level of neutral interest rates in advance, with one suggesting that the Bank of Japan "adopt an approach of carefully monitoring the effects of policy rate hikes in each phase, using anecdotal information and various indicators, and evaluating neutral interest rates using estimates obtained from econometric models." JPMorgan believes that this indicates that the Bank of Japan sees limitations in accelerating the pace of rate hikes. In these discussions, there were also concerns that the delay in adjusting the Bank of Japan's policies is causing undesirable fluctuations in the Japanese government bond and foreign exchange markets. Members pointed out that "the depreciation of the yen and the increase in long-term government bond yields to some extent reflect policy rates being too low relative to inflation rates," and "the level and volatility of long-term government bond yields seem to reflect risk premium factors." These views seem to be increasingly recognized within the Bank of Japan, and JPMorgan believes that these are the risk factors that may prompt the Bank of Japan to temporarily accelerate its rate hikes.