Sources say the Bank of Japan is leaning towards keeping interest rates steady next week

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TOKYO, Dec 12 (Reuters) – The Bank of Japan is leaning toward keeping interest rates steady next week as policymakers prefer to spend more time reviewing overseas risks and clues about next year’s wage outlook, five sources familiar with the bank’s thinking said.

Any such decision would increase the likelihood of a rate hike at a subsequent central bank meeting in January or March, when more information will be available on how much wages will rise next year.

Sources said that the central bank has not yet reached a consensus on the final decision, and some board members still believe that Japan has met the conditions for raising interest rates in December. The decision will depend on each board member’s belief in Japan’s chances of achieving sustained, wage-driven price increases.

The board is also likely to favor action if upcoming events, such as a Fed rate-setting meeting that ends hours before the Bank of Japan meeting, trigger another plunge in the yen, adding to inflationary pressures.

But overall, they said, while Japan’s borrowing costs remain close to zero, many BOJ policymakers appear to be in no hurry to pull the trigger and there is little risk of inflation overshooting.

“Japan does not need to raise interest rates immediately,” one source said. “With tame inflation, it can afford to take its time to review various data,” another source said, a view echoed by two other sources. .

The Bank of Japan will hold its final policy meeting of the year on December 18-19, when the nine-member board will consider whether to raise short-term interest rates from the current 0.25%.

More than half of economists polled by Reuters last month expected the Bank of Japan to raise interest rates in December. About 90% predict the Bank of Japan will raise interest rates to 0.5% by the end of March.

In contrast, the market currently predicts a less than 30% chance of a rate hike in December.

The central bank has been cautious about the timing of its next rate hike, causing market expectations for rate hikes to fluctuate between December and January.

Sources said there is a growing belief within the Bank of Japan that with the economy growing at a moderate pace, wages rising steadily and inflation exceeding the 2% target for more than two years, the conditions are in place for another interest rate hike.

They said the central bank was likely to maintain its view that “moderate growth in consumption is a trend”, a sign of its confidence in the economic outlook.

However, due to the recent rebound of the yen, the inflationary pressure caused by raw material imports has subsided, and the sense of urgency to raise interest rates does not exist. This is in stark contrast to the Bank of Japan’s hike in interest rates to 0.25% in July, when rapid currency depreciation pushed up import prices and increased the risk of inflation overshooting.

While rising wages are prompting more companies to raise prices for services, such moves are not enough to trigger a worrying spiral of wage inflation, sources said.

Taking action in December (rather than January) could give markets the impression that the BOJ is eager to raise interest rates to a level seen as neutral for the economy – something it wants to avoid.

The Japanese government still believes that Japan is still in a state of economic stagnation and also hopes that the Bank of Japan will act cautiously.

Asked about the December meeting, a senior government official told Reuters: “It would be better for the Bank of Japan to delay raising interest rates until the economy recovers further.”

Unless another rapid depreciation of the yen adds to inflationary pressures, many BOJ policymakers may prefer to wait for information on whether companies will go ahead with big wage increases in wage talks with unions next year, sources said.

Postponing the meeting to Jan. 23-24 will allow the BOJ to scrutinize comments from business executives on next year’s wage outlook, as well as quarterly regional reports that include information on how small businesses set prices and wages.

Another motivation for dampening sentiment is uncertainty over U.S. President-elect Donald Trump’s economic policies, a risk highlighted by Governor Kazuo Ueda in recent media interviews.

A third source said “the biggest risk to Japan’s economy comes from overseas” as sluggish global demand could hurt corporate profits and curb their willingness to raise wages.

The Bank of Japan’s decision next week will come hours after the Federal Reserve announces a rate cut, which is widely expected to happen.

Sources said a surprise move by the Federal Reserve to keep interest rates on hold and trigger a surge in the dollar could force the Bank of Japan to raise interest rates to slow a sharp sell-off in the yen.

The Bank of Japan ended negative interest rates in March and raised its short-term policy target to 0.25% in July. It has said it is ready to raise interest rates again if wages and prices move as expected, and has reinforced its belief that Japan will continue to hit 2% inflation.

(Reporting by Reika Kihara, additional reporting by Takahiko Wada, Yoshifumi Takemoto, Kentaro Sugiyama and Takaya Yamaguchi; Editing by Sam Holmes)