Aurelia Butler

TOKYO (Reuters) – Bank of Japan policymakers are debating how soon they can start telegraphing an eventual interest rate hike, which could come even before inflation hits the bank’s 2% target, sources say, emboldened by broadening price rises and a more hawkish Federal Reserve.While an actual rate hike is hardly imminent and the BOJ is on course to maintain ultra-loose policy at least for the rest of this year, financial markets may be under-estimating its readiness to gradually phase out its once-radical stimulus programme.Notably, the BOJ’s carefully worded promises to keep monetary policy accommodative apply only to steadily pumping cash into markets – not to keeping rates at current low levels.”The BOJ never committed to keep rates on hold until inflation exceeds 2%,” a source familiar with the BOJ’s thinking said, a view echoed by two more sources.”That means theoretically, it can raise rates before inflation is sustainably above the target.”After nine years of aggressive monetary easing, the BOJ appears to be finally getting what it wanted. Inflation is creeping up toward its elusive goal and already shifting public perceptions that deflation will persist.With the rise driven by higher raw material prices, rather than a hoped-for uptick in domestic demand, the BOJ’s near-term priority is to avoid a transitory blip in inflation from fueling market speculation of an early policy tightening.Many BOJ officials don’t expect conditions to fall into place to justify a rate hike this year, given uncertainty on whether consumption will strengthen enough to allow firms to keep raising prices.That may mean an actual rate hike may not come until well into 2023 and under a new governor who would succeed incumbent Haruhiko Kuroda, whose term ends in April next year.But the Fed’s steady rate hike plan, a weak yen and growing public discontent over rising living costs are prodding the BOJ to be bolder in brainstorming a future exit plan, sources said.”For the first time in a while, there’s not just downside but upside risks to the price outlook,” a second source said.”The BOJ needs to pay close attention to what other central banks are doing,” a third source said, pointing to an increasing number of overseas counterparts eyeing rate hikes.The central bank’s nine-member board is split between those who see scope to scale back stimulus, and those cautious of taking any step that could be interpreted as policy tightening, the sources said.JOINING THE LINE FOR THE EXITSThe BOJ has already been phasing out quantitative easing (QE) by steadily tapering asset purchases. The current pace of its bond buying is less than one-fifth the level in 2016, when it shifted to a policy targeting interest rates from the pace of money printing. (Graphic: BOJ has steadily ‘stealth’ tapered its JGB buying, https://graphics.reuters.com/JAPAN-ECONOMY/BOJ/byvrjmeoyve/chart.png) It is also slowing purchases of risky assets and will phase out a coronavirus pandemic-relief loan scheme in March, a move that will reduce cash supply to the economy.The BOJ has been able to taper without shocking markets partly as the moves came when stocks were rallying and the yen was weakening as a trend.For the BOJ, the sequence would be to continue tapering asset buying and move towards tweaking its yield curve control (YCC) targets, which are set at -0.1% for short-term rates and around zero for 10-year bond yields.The central bank is starting to drop signals that the days of forever-zero-rates may be numbered by flagging heightening prospects of rising inflation.Kuroda said last month inflation may approach its 2% target on rising raw material costs, offering his clearest signal to date that upward price pressures will broaden.That followed a comment by deputy governor Masayoshi Amamiya that inflationary pressures were gradually growing with more companies being able to pass on costs to consumers.The next step could be to tweak its guidance on the future path of rates, from the current pledge to keep them at “current or even low levels,” the sources said.This may happen even before inflation sustainably hits 2%.The BOJ promises to increase the pace of money printing until inflation stably exceeds 2%. But it has made no promise on how long it will keep its rate targets at current levels.”It’s clearly intentional,” said a fourth source on the rate guidance language. “Central banks must leave themselves with some flexibility in adjusting rates.”While there is no consensus within the BOJ, ideas include abandoning negative rates, widening the implicit band under which it allows 10-year yields to move around its 0% target, or targeting shorter-duration bond yields, the sources said.There is uncertainty on how soon the BOJ can actually raise rates, even as expectations grow that the Fed will hike three times this year, starting as soon as March.Years of aggressive monetary easing and prodding by the government have failed to convince firms into raising wages.Political factors also tie the BOJ’s hands.The government depends on the BOJ to underwrite Japan’s huge debt pile which, at twice the size of its economy, is the biggest among advanced nations. Even a small rise in borrowing costs could deal a devastating blow to Japan’s finances.That could mean the task of raising rates would be left to the next BOJ governor. Amamiya is considered among strong candidates to succeed Kuroda.”If consumers become more accommodating to price hikes, that could allow the BOJ to debate raising rates,” a fifth source said. “But negotiating with the government won’t be easy and will take time, given Japan’s huge public debt.” More

(Reuters) – San Francisco Federal Reserve Bank President Mary Daly on Thursday said that with high inflation that’s not abating and a labor market on a tear by nearly all measures, raising interest rates in March makes sense. “I don’t want to put a stake in the ground and say, definitely March,” Daly told Reuters in an interview. But, “lifting off in March when you have an unemployment rate of 3.9%, and an inflation rate that’s north of our price stability goal of average 2% inflation, to me seems a quite reasonable thing.”Consumer prices, which surged 7% in December from a year earlier, are rising across a broader range of goods and services than just the pandemic-related ones that saw price spikes early on. Meanwhile unemployment has dropped to 3.9%, not far above where it was before the pandemic hit.”Lifting off and withdrawing some of the emergency accommodation we’ve offered the economy is actually an appropriate thing to do,” she said, and will help sustain the recovery longer so more workers will ultimately have a chance to return to the labor force. In the past week or so a raft of Fed policymakers have said they could seeing raising interest rates at their March 15-16 meeting. It’s a possibility that was widely seen as remote as recently as November, when Daly was calling for patience on policy to allow more workers time to get jobs. A lot has changed since then, she said on Thursday, to bring her around to the conviction that policy does need to adjust this year. “Back then I was hopeful that more labor supply response would be coming, but it hasn’t; and then we had Omicron which tells me it’s probably not going to come,” Daly said, because workers who were sidelined by childcare responsibilities or health concerns earlier in the pandemic continue to be so. On top of that, she said, supply chain disruptions haven’t gone away, and she’s hearing hints of rising inflation expectations from business contacts who say workers are asking for higher wages to cover higher inflation. “I now see that we are going to need to make some adjustment in the policy rate this year,” she said, though unlike some of her colleagues, she declined to predict how many rate hikes will be needed this year, except to say she does not believe it will be more than three.NOT ENOUGH TO BRIDLEThe Fed has kept its policy rate at near-zero since the pandemic hit in March 2020, and also bought trillions of dollars of Treasuries and housing-backed bonds, at first to stabilize financial markets and then to add extra lift to the economy as it emerged from the initial crisis.Last fall, as inflation and employment continued to rise, the Fed decided to gradually reduce its asset purchases, easing off some of the stimulus it was delivering. In December, with inflation still high, they decided to speed that process up, and end all bond-buying by March. Even with rate hikes, she said, “we are not bridling the economy and starting to restrain it,” noting that rates will still be well below the “neutral” level of 2.5% where they are likely neither stimulating nor braking the economy. Inflation, she said, will remain high for much of the year, though it should moderate as supply chains get unclogged and once the latest surge in COVID-19 subsides. Once the Fed has raised rates once or twice, she said, it should begin shrinking its $8-plus trillion balance sheet at a “predictable” rate that won’t change meeting by meeting, but that’s faster than the last time the Fed trimmed its balance sheet. More

WASHINGTON (Reuters) -The Washington subway system said on Thursday that it plans to delay the return of trains like the one that derailed in October by another 90 days.Metro, the D.C.-area subway system, said it will not resume efforts to return 7000-series trains into passenger service to allow “engineering and mechanical experts time to focus on root cause analysis and acquire technology to measure 7000-series wheelsets.”A safety commission in October ordered the subway system to indefinitely remove about 60% of its railcars following inspections after the derailment. Metro has been operating reduced service since then.Metro serves the U.S. capital and parts of Maryland and Virginia. Current service is averaging under 200,000 rail trips daily – less than one-third pre-pandemic demand due to several factors, including telework and the Omicron surge, Metro said.In December, Metro began to bring its 748 7000-series trains back into service but the safety commission found some did not meet the criteria specified in its return to service plan and they were removed.The commission required revisions to the plan before any 7000 Series cars could be returned to passenger service.In October, the Federal Transit Administration (FTA) asked U.S. transit agencies to conduct inspections of wheel gauges on rail cars following the Washington subway derailment.The National Transportation Safety (NTSB) said the train had derailed at least three times on Oct. 12.The derailment did not injure any of the 187 passengers onboard, but NTSB chair Jennifer Homendy said the incident could have been “catastrophic.”Metro said Thursday it is working to accelerate efforts to restore 6000-series railcars to increase the availability of newer cars in the fleet and improve service. More