BOJ debated weak-yen risk, scope for more rate hikes at Jan meeting, summary shows

By Leika Kihara

TOKYO (Reuters) -Bank of Japan policymakers discussed the likelihood of raising interest rates further with some warning of upside inflation risks and the damage a weak yen could inflict on the economy, a summary of opinions at their January meeting showed on Monday.

The debate highlights an increasing chance the central bank will continue to push up borrowing costs in several stages, even after hiking short-term interest rates to 0.5% at the Jan. 23-24 meeting - the highest for Japan in 17 years.

Several BOJ board members pointed to a build-up of upward price pressure that could lead to an overshoot in inflation, as rising import costs from a weak yen prod more firms to hike prices, the summary showed.

"With economic activity and prices remaining on track, risks to prices have become more skewed to the upside," one member was quoted as saying, adding the BOJ must raise rates in a "timely and gradual manner."

Another opinion called for more rate hikes to prevent further yen declines and an overheating of financial activities, "both of which appear to be due to excessively high expectations of continued monetary easing."

"Real interest rates are expected to remain significantly negative" even after the BOJ's rate hike to 0.5%, a third opinion was quoted as saying.

"If economic activity and prices remain on track, it will be necessary to continue hiking rates accordingly, so that the negative range of real interest rates will shrink," the member said.

There were few hints in the summary, however, on how far BOJ should eventually raise interest rates.

While one member said the BOJ should clarify its thinking on the policy rate in the future, another opinion said it must be "extremely cautious" about giving signs on the pace or extent of future rate hikes given high uncertainty on the outlook, the summary showed.

At the January meeting, the BOJ raised its short-term policy target to 0.5% from 0.25% and revised up its price forecasts, underscoring its confidence that rising wages will keep inflation stably around its 2% target.

The move followed last year's decision to exit a decade-long massive stimulus in March and a rate hike to 0.25% in July.

With inflation exceeding 2% for nearly three years, the slow pace of BOJ rate hikes have kept Japan's real borrowing costs deeply negative. Some analysts and politicians blame the BOJ's still-low interest rates for keeping the yen weak and hurting consumption by pushing up fuel and raw material import costs.

BOJ Governor Kazuo Ueda has stressed his resolve to keep raising interest rates if prospects of sustained wage gains underpin consumption, and help Japan durably achieve the bank's 2% inflation target.

The January meeting was held days after U.S. President Donald Trump's inauguration. While some voiced hope the U.S. economy will achieve a soft landing, others warned of the damage Japan's economy could face from a combination of renewed U.S. inflation, rising U.S. interest rates and intensifying global trade friction, the summary showed.

The summary does not reveal the identity of the board member who made the comment.

(Reporting by Leika Kihara; Editing by Muralikumar Anantharaman & Shri Navaratnam)