BOJ expected to choose 'constructive ambiguity' on future rate hikes

By Leika Kihara

TOKYO, Dec 5 (Reuters) - Investors seeking clarity from the Bank of Japan on how much higher interest rates could go could be disappointed, former central bank officials say, as clear-cut estimates on neutral interest rates are too difficult and even counter-productive.

Governor Kazuo Ueda's hawkish signals on Monday have led markets to almost fully price in the chance of a hike in the BOJ's policy rate to 0.75% from 0.5% in December.

He also said the central bank will offer clearer guidance on how far its policy rate is from the neutral rate - or the level that neither stimulates nor cools growth - heightening attention to what signals he may drop on the future rate-hike path.

The BOJ's current estimates suggest Japan's nominal neutral rate of interest lies somewhere in a range of 1% to 2.5%.

As a hike to 0.75% would bring the policy rate close to the bottom of the range, some analysts bet the BOJ will revise up the neutral rate estimate to tell markets that it can still keep hiking rates without hurting the economy.

While BOJ officials have been tight-lipped, former central bank officials doubt it will disclose any precise, new estimate of the neutral rate that meets market expectations.

"I won't expect too much to come out from the BOJ," said Seisaku Kameda, the BOJ's former top economist, predicting Ueda may indicate where within the wide range the neutral rate could be - but not give any further clarity.

"When there's so much uncertainty, you don't want to tie your hands by committing to a set figure. You need constructive ambiguity to leave yourself policy flexibility," said Kameda, who was involved in drafting the BOJ's economic forecasts.

Ayako Fujita, also a former BOJ official who is now chief Japan economist at JPMorgan, expects the BOJ to stress that 1.0% is just the bottom of the estimated neutral rate range, and that the actual rate could be higher.

"But it will continue to say it doesn't really know what the actual level is," she said. "The BOJ probably wants to have markets price in a neutral rate around 1.5%. The communication, however, will be tricky."

The BOJ is not the only central bank wary of revealing details about the neutral interest rate. While used by central banks as a benchmark in setting monetary policy, it is not directly observable and hard to estimate as factors affecting it, such as productivity, change over time.

Some market players say the BOJ must provide hawkish guidance pledging to keep raising rates, even after hiking rates to 0.75%, to avoid unleashing a fresh wave of yen selling.

But Nobuyasu Atago, who during his stint at the BOJ served as staff to the board, warns of the danger of provoking markets with such signals.

"When the bond market is so jittery, the BOJ would cause yields to spike the moment it releases a hawkish neutral rate estimate," said Atago, currently chief economist at Rakuten Securities Economic Research Institute.

"I think that would be a very bad idea."

(Reporting by Leika Kihara; Editing by Sam Holmes)