The Bank of Japan (BOJ) is poised to raise its benchmark interest rate to 1.0% on Tuesday, marking its first rate hike in six months. This move would push Japan’s policy rate to its highest level in 31 years, not seen since 1995.
The central bank is expected to increase the short-term policy rate by 0.25 percentage points, from 0.75% to 1.0%, around noon that day. This decision is largely driven by concerns that rising energy prices, fueled by the Middle East conflict, could stoke inflation.
This meeting is unprecedented as Governor Kazuo Ueda will be absent due to hospitalization for a cyst infection. The policy decision will be made by a majority vote of the eight present policy board members, with Deputy Governor Shinichi Uchida stepping in to conduct the press conference.
Market attention has shifted from the rate hike itself to Uchida’s potential signals regarding future rate increases and government bond purchasing policies. With the rate hike already priced in, analysts predict a 94-96% probability that the yen carry trade will continue without major disruption.
The recent oil price plunge following the U.S.-Iran peace agreement could potentially ease pressure on the yen by reducing Japan’s crude oil import costs.
However, given the ongoing volatility in the Middle East, it remains uncertain how assertively the BOJ will address inflation risks. A strong emphasis on inflation concerns would signal a more aggressive tightening stance.
In December, when the BOJ last raised rates from 0.5% to 0.75%, Ueda’s cautious remarks led to further yen depreciation. The yen currently trades around 160 JPY per USD (about 1.07 USD), with growing market vigilance about possible foreign exchange interventions.
As central banks worldwide pivot towards tightening, an overly cautious tone from Uchida could be interpreted as dovish, potentially triggering further yen depreciation.
Mari Iwashita, chief interest rate strategist at Nomura Securities, told the Nikkei that while the June rate hike is already factored in, Uchida’s comments on future rate hikes and inflation risks will be crucial in determining the yen’s trajectory.
The Nikkei reports that Uchida is regarded as a key architect of BOJ’s monetary policy over the past decade. He has been instrumental in designing unconventional policies like negative interest rates and yield curve control (YCC), and recently garnered attention by hinting at an eventual end to large-scale monetary easing in 2024.
Market observers view Uchida as more direct in his communication than Ueda. However, he faces the delicate task of delivering a sufficiently hawkish message to prevent yen freefall while staying aligned with Ueda’s policy direction.
Bloomberg suggests that if Uchida emphasizes the continued low real interest rates and accommodative monetary policy, it could fuel expectations for additional rate hikes later this year.
Notably, Uchida himself has just been discharged after months of leukemia treatment. This marks the first time since the 1998 Bank of Japan Law that a governor has missed a meeting due to health reasons. Ueda will submit written opinions to the policy committee without voting rights and is expected to return for the July meeting.