BOJ deputy governor flags chance of rate hike next week

By Leika Kihara

YOKOHAMA (Reuters) -The Bank of Japan will debate whether to raise interest rates next week as prospects of sustained wage gains heighten and the U.S. policy outlook becomes clearer in President-elect Donald Trump's inaugural address, Deputy Governor Ryozo Himino said.

In a speech to business leaders in the city of Yokohama, Himino said on Tuesday it would "not be normal" for real interest rates to remain negative once Japan had overcome shocks and factors that caused deflation.

Various surveys and reports from the central bank's regional branches had heightened hopes that wage growth would remain strong this year, he said.

Himino also said the U.S. economy was likely to remain strong for the time being, and the "broad direction" of U.S. economic policy would likely become clear in Trump's inaugural address on Jan. 20.

"The board will discuss whether to raise interest rates next week and reach a decision, based on the economic and price projections laid out in our quarterly outlook report," he said.

The remarks come ahead of the BOJ's two-day policy meeting concluding on Jan. 24, when some analysts expect the bank to raise short-term rates from the current 0.25%. The board will also issue fresh quarterly growth and price forecasts that serve as the basis for setting monetary policy.

Himino's views on wages and the U.S. policy outlook have been closely watched by markets, after Governor Kazuo Ueda cited uncertainty over the domestic wage outlook and Trump's policies as reasons to hold off raising rates last month.

The remarks by Himino, coupled with rising U.S. Treasury yields, pushed up the benchmark 10-year Japanese government bond (JGB) yield to a 14-year high of 1.250% as markets priced in the chance of January hike. The rise in JGB yields weighed on the Nikkei average.

"His remarks could be interpreted as laying the groundwork for a January rate hike," said Katsutoshi Inadome, senior strategist at Sumitomo Mitsui Trust Asset Management.

MUST HIKE 'WITHOUT DELAY'

In a news conference after the meeting with business leaders, Himino said he would scrutinise Trump's inaugural speech for clues on the "balance and schedule" of the new president's policy steps, to confirm whether U.S. growth would stay firm.

He said there were both upside and downside risks to Japan's economic and price outlook, adding that month-on-month rises in import costs had been "quite high" due partly to the weak yen.

"When the appropriate timing comes, we must shift policy without delay, as the effect of monetary policy is said to show up with a lag of one to one-and-a-half years," Himino said.

"The likelihood of Japan's economy moving in line with our projection is heightening gradually," he said.

The BOJ ended negative interest rates in March and raised its short-term rate target to 0.25% in July on the view Japan was on track to durably meet the bank's 2% inflation target.

Governor Ueda has signalled readiness to raise rates further if broadening wage hikes underpin consumption and allow companies to keep hiking prices not just for goods but services.

In a quarterly report analysing regional economies released last week, the BOJ said wage hikes were spreading to firms of all sizes and sectors, signalling that conditions for a near-term rate hike were continuing to fall into place.

Prospects of sustained wage gains and the increase in import costs due to a weak yen have heightened attention within the BOJ to rising inflationary pressures that may lead to an upgrade in its price forecast this month, sources have told Reuters.

In a Reuters poll conducted last month, all the respondents predicted the BOJ would raise rates to 0.50% by end-March but were divided on the exact timing. After the January meeting, the central bank next holds a rate review on March 18-19.

(Reporting by Leika Kihara; additional reporting by Tomo Uetake; Editing by Chang-Ran Kim, Kim Coghill and Sonali Paul)