Preview: Bank of Japan to Hold Overnight Rate Target Just Above Zero Friday After Last Month’s Rate Hike; Set for Gradual Tightening in Coming Months

–Yen Remains Weak, Pushing Up Import Costs, but BOJ Unlikely to Raise Rates Just to Try to Guide Yen Higher
–Governor Ueda Predicts Gradual Rate Hikes but Also Warns Inflation Surge Amid Weak Yen Could Cause Policy Shift

By Max Sato

(MaceNews) – The Bank of Japan is likely to maintain its overall policy stance at its two-day meeting ending Friday, as its governor has predicted a gradual pace of rate increases toward an eventual tightening of monetary conditions, but the bank may have to accelerate its future rate hike scenario if the yen continues to depreciate and push up import costs.

The BOJ’s nine-member board is expected to hold the overnight interest rate target steady in a range of zero to 0.1% in a majority to unanimous vote at its April 25-26 meeting after conducting its first rate hike in 17 years and ending the seven-year-old yield curve control framework last month. The move is part of the process of normalizing the bank’s monetary policy after 11 years of aggressive easing has fulfilled its purpose of turning the stubborn deflation mindset among households and businesses.

The board is also expected to discuss whether it needs to slow the pace of asset purchases to remove any excess easing effects. Last month it decided to no longer target the yield on 10-year Japanese government bonds (JGBs), which had been capped at around 0.1%, but also decided to continue its purchases of JGBs “with broadly the same amount as before,” which is currently about 6 trillion yen a month.

The bank is expected to announce the results of the meeting and release its quarterly Outlook Report sometime between 11:30 a.m. and 1 p.m. JST on Friday, April 26 (0230 and 0400 GMT the same day/10:30 p.m. on Thursday, April 25 and midnight EDT on Friday, April 26). The previous two-day meeting ended at 12:28 p.m. JST (0328 GMT) on March 19, which was 11:28 p.m. EDT on March 18.

The focus is also on remarks by Governor Kazuo Ueda at his post-meeting news conference that usually lasts for about an hour from 1530 JST on Friday, April 26 (from 0630 GMT/0230 EDT until 0730 GMT/0330 EDT the same day).

At their March meeting, many board members judged that the risk of Japan’s economy slipping back into deflation had been reduced and inflation was likely to be led by sustained wage hikes, instead of a spike in import costs, following news that wage hikes for fiscal 2024 ending in March 2025 were set to well surpass the pace of increase seen in the previous year.

Ueda told a post-meeting news conference on March 19 that the pace of further rate hikes as part of the bank’s policy normalization process was likely to be gradual and that financial conditions were expected to remain accommodative for now. But after the Group of 20 meeting last week, he also told reporters that if the depreciation of the yen pushes up import costs and thus inflation, having a huge impact that cannot be ignored, “it could cause a change in monetary policy.” It is generally estimated that the depreciation of the yen takes about six months to be reflected in import costs in domestic consumer prices.

Economists and market participants believe that the next rate hike is likely to be in July, September or October, when more evidence of a higher pace of wage hikes emerges. Governor Ueda has predicted that the next rate hike will be possible from the summer to fall (normally June to October in Japan) if wages data support such a move.

The bank provides an update to the board’s growth and inflation projections as well as its risk analysis in the Outlook Report after the January, April, July and October meetings, and thus any of those timings are considered good for changing policy as the board can back up its decision with its latest forecast. However, BOJ officials have said they do not predetermine the timing of their next move, noting policy decisions should be flexible and nimble in response to changing economic and financial conditions.

One thing that is threatening the luxury of a gradual pace of rate hikes and making BOJ decisions more challenging is the continued slide in the yen’s value against the dollar and other currencies. The weak yen makes imports more expensive, which could raise an upside risk to the bank’s main inflation scenario, but at the same time it also reduces purchasing power of many households, leading to a higher downside risk to economic growth.

In the January Outlook Report, the board’s projections for core CPI (excluding fresh food) were 2.4% in fiscal 2024 and 1.8% in fiscal 2025. These figures may be revised up slightly in the April report. Amid global uncertainties, the board is likely to make only slight changes to its GDP forecasts of 1.2% for fiscal 2024 and 1.0% for fiscal 2025.

The dollar has been supported by the need for Japanese importers to buy dollars to hedge against a spike in the value of the dollar, which is widely used as the settlement currency. There is also speculative dollar buying on the assumption that the BOJ’s future rate hikes will be only gradual and the Federal Reserve is in no hurry to start lowering interest rates as the U.S. economy has been resilient and inflation remains sticky.

The yen has depreciated beyond ¥155, a 34-year low, after briefly firming to ¥147 in early March on emerging signs that the BOJ wouldn’t wait until April to hike rates.

Japanese officials have repeatedly said they are watching the currency market “with a high sense of urgency,” suggesting they are prepared to intervene. Finance Minister Shunichi Suzuki has been warning against one-sided yen selling, saying the government will “respond to excessive moves (in the currency market) appropriately, without ruling out any options.”

Last week, Suzuki stressed that he and his U.S. and South Korean counterparts shared their “serious concern” about the recent sharp depreciation of the yen and won. The Ministry of Finance currency intervention team seems to be standing by for a better timing to step in when yen short positions build up and markets start to speculate for the next BOJ rate hike and lower U.S. inflation figures. Japanese officials are also aware that their funds for dollar selling are limited as they come from Tokyo’s foreign reserves, compared to ample yen cash that would be used in yen selling intervention.

Previously, the dollar briefly surged to ¥151.94 in October 2022 (a 32-year high at the time) but Japan’s second wave of massive yen-buying forex intervention pushed it down to a low of ¥143.55 in the same month. It is uncertain whether market intervention would have a similar effect at this point when demand for the dollar remains strong in the market.

Share this post