By Megumi Fujikawa


YOKOHAMA, Japan--The Bank of Japan will discuss potentially raising the policy rate next week, a deputy governor said, but refrained from hinting at the likelihood that it will take that option.

"In conducting monetary policy, it is difficult but essential to judge the right timing," Deputy Gov. Ryozo Himino said in a speech to business leaders in Kanagawa prefecture, near Tokyo.

He said the bank will discuss whether to raise the policy rate or not at the meeting on Jan. 23-24, based on the latest outlook for the economy and prices.

Although the deputy governor didn't strongly signal a hike next week, he said the economy and prices are on track toward the bank's goal.

"The developments in prices and inflation expectation, including the economic mechanisms behind them, seem to have been largely on the path" projected by the central bank, Himino said.

"If this outlook will continue to be realized, the bank will raise the policy interest rate accordingly and adjust the degree of monetary easing, as it did in March and July last year," he added.

After Himino mentioned the rate-hike option, the benchmark 10-year Japanese government bond yield rose to 1.250%. The policy-sensitive two-year JGB yield hit 0.680%, its highest level since October 2008.

The yen initially weakened to around 158 against the dollar in the absence of a direct hint that a January hike is coming but regained ground later. The pair last stood at 157.60.

Mizuho Securities economist Yusuke Matsuo said Himino's speech lacked direct clues on the possibility of a January rate hike. But "it emphasized that the option, which had been receding at one point, is still on the table," he said in a research note.

The BOJ is widely expected to raise interest rates in the near future but the timing is still unclear. It is carefully assessing wage trends in Japan and future U.S. economic policies under President-elect Donald Trump.

Some economists expect the central bank to take action this month. Others think it will wait until the preliminary results of Japan's annual spring wage negotiations become available in March.

Himino said Japan's healthy corporate profits, labor shortages and a minimum wage hike will likely encourage another year of strong pay increases.

Information that has came out since the previous December meeting, including reports by BOJ branch managers, suggests that the result of wage talks could turn out as strong as last year's, Himino said at a news conference later Tuesday.

According to the central bank's recent regional economic report, the view that continuous wage increases are necessary has become more widespread in the corporate sector, although some small firms are cautious about giving raises.

Ahead of the annual negotiations, some major Japanese companies have already promised to give solid pay raises. The focus is on whether small firms, which employ about 70% of workers in Japan, can follow suit when rising costs squeeze profits.

As for the U.S. policy outlook, another concerning factor for the BOJ, the deputy governor expects the inaugural address by Trump scheduled for Monday to give an idea on the broad direction of policies to be taken by the new administration.

Himino said he will pay close attention to the address to see if the new president confirms plans to proceed with proposed policies, or announces new ideas.

In terms of how the world's largest economy is faring, the deputy governor said he expects the U.S. to remain on solid footing for now.


Write to Megumi Fujikawa at megumi.fujikawa@wsj.com


(END) Dow Jones Newswires

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