Photo/Illutration Bank of Japan Governor Kazuo Ueda speaks at a news conference on July 31 in Tokyo’s Chuo Ward. (Naoko Kawamura)

Bank of Japan Governor Kazuo Ueda said he believes the BOJ's decision on July 31 to hike interest rates to around 0.25 percent will not have a "major negative impact on the economy."

The decision comes four months after the BOJ lifted negative interest rates in March for the first time in 17 years.

Why did the BOJ decide to raise interest rates now? What will be the impact on the economy?

Excerpts of the main exchange between Ueda and reporters at a news conference follow:

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Question: Why did the Bank of Japan decide to raise interest rates at this time?

Kuroda: I believe that wages are steadily reflecting the results of the “shunto” spring negotiations and that consumption, while not extremely strong, is firm. Even though interest rates have been raised, the real interest rates is at a very low level, and I do not think it will have a major negative impact on the economy.

It will be easier later on if adjustments are made early, even if only gradually. Given that inflation has been above 2 percent for quite some time and there is a risk that it could go even higher, I thought it was about right.

Q: Is the weakness of personal consumption a cause for concern?

A: Although the impact of rising prices can be seen, the economy is firming up. I am hearing calls for wage increases from a wide range of regions, industries and companies of all sizes, and the trend toward higher wages is spreading. I believe that an increase in wage income will support consumer spending.

Q: What are the chances of an additional interest rates hike before the end of the year?

A: It depends on the data going forward. If rates are in line with or exceed the forecast, there could be a further adjustment in short-term interest rates.

I do not have a road map in mind in advance, such as “let’s raise interest rates every few months.” It is difficult to say in advance when the next decision will be made.

Q: The policy interest rates has not been above 0.5 percent for many years. What is the basis for your decision to go above 0.5 percent?

A: If the economy and prices move in line with the outlook, (the BOJ) will continue to raise interest rates. In that case, I am not particularly conscious of 0.5 percent (as a barrier).

Q: You decided to raise interest rates and reduce government bond purchases at the same time. This will exert upward pressure on short- and long-term interest rates.

A: The reduction was announced in June and was factored in to a large extent. The upward pressure on interest rates is not significant.

Q: How much did the yen’s depreciation affect the decision?

A: The weak yen has not had a major impact on the BOJ’s price outlook. However, I assessed the risk of the yen’s depreciation having an upward impact on our price outlook as quite large, and I have taken policy measures that include this risk.

Q: What is the impact on household finances, such as mortgage payments?

A: The interest rates hike could have an impact on variable-rate mortgages. On the other hand, the decision to raise interest rates was made amid the prospect that wages will continue to rise.

Many variable-rate mortgages will remain unchanged for five years even if interest rates rise, so the burden will be greatly reduced because wages will rise first for five years and then interest payments will rise.

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