–BOJ Board Decides to Stand Pat in 6-to-3 Vote, Mulling Better Timing for Follow-Up Rate Hike
By Max Sato
(MaceNews) – Here are the key Japanese events for the coming week and a review of the holiday-shortened past week. The local markets will be closed from Monday, May 4 until Wednesday, May 6 in the second half of the Golden Week holidays.
Volatility in the foreign exchange markets during this period tends to be high in thin trading conditions but market participants may be cautious after the Ministry of Finance was suspected of firing a salvo during London trading hours (around 1700 JST/0800 GMT/0400 EDT) on Friday.
In a hurriedly arranged scrum with reporters, Finance Minister Satsuki Katayama simply said that “the timing of taking a decisive action is nearing” and declined comment on whether the MOF had actually stepped into the currency market, selling dollars for yen to prevent the yen from depreciating further and turning the tide toward a firmer yen away from the psychologically crucial level of Y160 to the U.S. currency.
Katayama chose to stay mysterious, advising reporters “to hold on to your smartphones whether you are stepping out or being asleep” and telling them that all she could say was that she had been warning about “taking a decisive action” in the foreign exchange market and that “such timing is nearing.”
Following those comments, the yen rallied sharply, rising about Y5 within hours to the Y155 level. The dollar stood at around Y156.75 on Sunday morning Tokyo time. Vice Finance Minister for International Affairs Atsushi Mimura told reporters that what has happened in the FX markets during the Golden Week holidays is “just a beginning.”
Katayama and her deputy Mimura earlier on Thursday warned against the yen’s slide as the currency weakened to Y160.72 in Tokyo trading, its weakest level since July 2024. The Middle East conflict is choking off oil and gas shipments from the Gulf states through the Strait of Hormuz, particularly hurting Japan that relies heavily on crude oil from the Gulf.
If Tokyo did conduct currency intervention, it would be the first time since July 2024, when it spent a total of Y5.53 trillion ($35 billion) to support the currency after it had weakened to an around 38-year low against the dollar close to Y162.
The yen remains depressed as the U.S. Federal Reserve has been cautious about cutting interest rates in the face of growing upside risks to inflation sparked by the Iran war while policy normalization by the Bank of Japan from zero to slightly negative levels have been at a snail’s pace, keeping the returns on holding dollar denominated assets attractive.
The notion of a weak yen still supports exporter share prices in Japanese stock markets but it hurts most of the stocks listed in Tokyo as the depreciation of the yen has boosted import costs for both households and businesses in the past few years.
Trade data has shown that a cheaper yen does not necessarily lead to higher export volumes because many firms have shifted their production closer to consumers.
Investors tend to believe that the Bank of Japan policy board would consider hiking rates to slow the yen’s depreciation but Japanese officials have warned that it’s not that simple. The dollar/yen exchange rate has been affected by other factors: real demand for the U.S. unit, geopolitical risks, a shift in the status of safe-haven currencies and speculative trading in cross pairs like euro/yen.
At its April 27-28 meeting, the BOJ’s nine-member board decided in a 6 to 3 vote to leave the target for the overnight interest at 0.75% after leaving it unchanged in an 8 to 1 vote at its previous meetings in March and January and conducting its first rate hike in six meetings in December by raising it by 25 basis points (0.25 percentage point) to a 30-year high in a unanimous vote.
The bank pointed to upside risks to inflation, given that underlying CPI inflation is approaching the bank’s 2% target and firms’ behavior is shifting more toward raising wages and prices.
Bank of Japan Governor Ueda told a post-meeting news conference on why the board stood pat: “To put it simply, the fundamental reason is that the certainty of our core outlook has diminished. Behind this, we must remain vigilant regarding the risk of inflation exceeding expectations and the risk of an economic downturn.”
Asked how long the bank would continue assessing risks before taking action, the governor replied, “We don’t prejudge (before going into the meeting). We will continue reviewing the probability of our outlook and the nature of risks at the next meetings onwards and make appropriate decisions.”
Ueda pointed to the common challenge for major central banks: Both downside risks to growth and upside risks to inflation are getting bigger, making it harder for policymakers to judge how they will evolve. He also said he needs a little more time to have a clearer picture of how the Mideast conflict will affect Japan’s wobbly recovery.
Board member Hajime Takata, formerly with Mizuho Securities, called for a rate increase to 1.0% for the third meeting in a row, arguing that the bank’s 2% inflation target has been “largely achieved” and that Japan’s inflation risks are “skewed to the upside due to second-round effects of price rises stemming from overseas developments.” Naoki Tamura, who came from the Sumitomo Mitsui banking group, rejoined Takata in calling for a 25 basis point hike, saying the bank should set the policy rate “as close to the neutral rate as possible” as inflation risks are “significantly skewed to the upside.”
Junko Nakagawa, a former Nomura Securities executive, joined the chorus for a 25 bp hike, noting that upside risks to inflation are high under the current accommodative financial conditions.
The board repeated that it will continue raising rates if growth and inflation evolve in line with its medium-term outlook, noting that real interest rates are at “significantly low levels.” The BOJ has been lifting the policy rate only gradually toward a more neutral level of at least 1%, noting that many firms are likely to continue raising wages into fiscal 2026 that began on April 1.
In its quarterly Outlook Report issued after the April 27-28 meeting, the bank brought forward the timing of hitting the 2% inflation target, saying “between the second half of fiscal 2026 and fiscal 2027,” underlying CPI inflation and the rate of increase in the core CPI (excluding fresh food) should increase gradually and will be “at a level that is generally consistent with the price stability target.” For years, the bank continued to peg the timing to “the second half of its projection period” (in this case, from fiscal 2026 through fiscal 2028).
On the data front, the effective blockade of the Strait of Hormuz by Washington and Tehran choked off factory output in Japan, squeezing the availability of naphtha cracked from light (low sulfur) crude, the source for ethylene, propylene and benzene among others. These petrochemicals are essential for producing plastics and resins that are used in most consumer and industrial goods ranging from vehicles and appliances to paint and food packages.
Industrial production shrank 0.5% on in March, closer to the low end of economist forecasts, posting its second straight drop after dipping 2.0% in February and rising 4.3% in January.
Looking ahead, the abrupt departure of the United Arab Emirates from the Organization of the Petroleum Exporting Countries, the 66-year-old cartel dictated by Saudi Arabia, which in the past worked as a swing producer in the interest of the United States, a close military ally, and remotely, Israel is often seen as influencing U.S. policymaking.
The UAE is bypassing the Strait of Hormuz, the crucial for oil and gas exports from the Mideast Gulf states to the world, particularly Asia, and shipping its Murban (high sulfur) crude out of its Fujairah port, but has been forced to cut its output by half in the wake of the Mideast conflict the broke out more than two months ago.
Japan relies 43.3% of its crude imports on the UAE, the largest supplier for the country, followed by Saudi Arabia (39.4%) and Kuwait (6.2%), a known OPEC quota cheater before Iraq invaded it in 1990. The long-standing UAE-Saudi feud is unlikely to strain Tokyo’s tides with either of them as refineries buy oil and gas mostly under term deals.
The monthly survey by the Ministry of Economy, Trade and Industry indicated that output would remain depressed, down 0.7% on the month in April, as the Iran war impact lingers despite plans to raise output of computer chips and vehicles as the auto industry has survived Trump tariff storms. At this point, the METI’s forecast index points to a 2.2% increase, led by the auto industry, but that is before adjusting the data’s upward bias (just like the pre-adjusted +2.1% projected for April).
The ministry maintained its assessment that industrial output was “taking one step forward and one step back.” The last change was made in the July 2024 report, when it upgraded its view.
Another indicator for projecting GDP pointed to sluggish but resilient consumer spending.
Japanese retail sales posted a modest 1.7% rise on year in March, propped up by demand for spring clothing at department stores, a pickup in auto demand and usual suspects of drugs/cosmetics, after slipping 0.4% in February in payback for a high level of auto sales in February 2025 and a 10th straight drop in fuel sales. Government subsidies continued depressing fuel prices in March.
The Ministry of Economy, Trade and Industry maintained its assessment after upgrading it in the January report, saying retail sales are “on a gradual uptrend.” It noted the three-month moving average rose an impressive 0.8% on a seasonally adjusted basis after being flat in February and 0.9% at the start of the year.
The 1.7% q/q gain for the January-March quarter points to resilient consumption in the Q1 GDP data (due May 19) but that’s just depicts the picture from the supply side. Economists, however, don’t wait for the demand side data, namely household spending because of its small data samples and rolling changes of the samples that is make it harder to trace spending patters by the same consumers. The forecasts also reply on industrial production for March and Q1 to check the pulse of domestic demand from the corporate viewpoints.
Industry data showed department store sales posted their third straight year-on-year increase in March, up 3.2%, after rising 1.6% in February, led by solid demand for spring clothing and high-end watches and jewelries. Sales to visitors from overseas marked their first gain in five months as the weak yen boosted their purchasing power. Chinese tourists continued boycotting Japan over bilateral diplomatic rows while spending by visitors from Taiwan, South Korea, Southeast Asia and the United States more than offset the impact of a 20% drop in sales to visitors from China.
Monday, May 4
Japanese markets are closed for the Greenery Day public holiday.
Thursday, May 5
Japanese markets are closed for the Children’s Day public holiday.
Wednesday, May 6
Japanese markets are closed for the Constitutional Memorial Day observed.
Thursday, May 7
Trading resumes after the Golden Week holidays but some market participants are not returning to work until Monday, May 11.
Friday, May 8
0830 JST (2330 GMT/1930 EDT Thursday, May 7) Ministry of Health, Labour and Welfare releases preliminary March average wages.