Bank of Japan expected to keep interest rates on hold after landmark hike
- The Bank of Japan is set to hold interest rates after its first hike since 2007 in March.
- The focus will be on BoJ’s updated forecasts and Governor Kazuo Ueda’s press conference.
- The volatility around the Japanese Yen could spike on the BoJ policy announcements.
The Bank of Japan (BoJ) is set to leave its short-term rate target unchanged in the range between 0% and 0.1% on Friday, following the conclusion of its two-day monetary policy review meeting for April. The BoJ will announce its decision on Friday at around 3:00 GMT.
The BoJ hiked the interest rate for the first time in 17 years in March, lifting Japan out of the negative interest rate policy (NIRP) for the first time since 2016.
What to expect from the BoJ interest rate decision?
With a steady policy widely expected, the markets’ attention will remain on the BoJ’s quarterly inflation and growth forecasts and the probable changes in the policy statement for fresh hints on the timing of the Bank’s next rate increase.
Markets are expecting the BoJ to hike rates again this year, with odds split between the chance of a lift-off in July, or sometime in the October-December quarter, according to Reuters.
Kyodo News Agency reported on Friday, citing sources familiar with the BoJ thinking, that the Japanese central bank is mulling an upward revision to its inflation outlook for fiscal year 2024 from the current 2.4%. The bank is also seen raising its forecast for fiscal year 2025 from 1.8% to around 2.0% while forecasting Japan's core inflation to be around 2% in fiscal 2026, the sources added.
These expectations hold even as Japan’s core Consumer Price Index (CPI) – a measure excluding fresh food and energy costs closely watched by the BoJ – moderated to 2.9% in March after increasing 3.2% in February. It was the first time since November 2022 that core inflation fell below 3%.
Easing price pressures in Japan fail to deter the BoJ’s path forward on interest rates, as the recent depreciation of the Japanese Yen (JPY) is likely to significantly push up inflation. Further, the BoJ focus remains on the potential increases in the services inflation and wages to determine the appropriate time for the next rate hike.
Japanese firms offered their biggest wage hikes in 33 years this year but the inflation-adjusted real wages have continued to decline for nearly two years.
When asked about the possibility of further rate hikes this year, in an interview with the Asahi newspaper earlier this month, BoJ Governor Kazuo Ueda said that "it's dependent on data.” "We'll adjust interest rates according to the distance towards sustainably and stably hitting 2% inflation”, Ueda added.
On Tuesday, Governor Ueda said that the BoJ will raise rates again if trend inflation accelerates toward its 2% target as expected. Japan's Weighted Median Inflation Index, a key measure of the country’s trend inflation, rose at its slowest pace in 11 months to 1.3% in March, the latest data published by the Bank of Japan (BoJ) showed on Tuesday.
Governor Ueda’s remarks imply that the central bank is shifting to a more discretionary approach in setting policy. The BoJ could remain on track to deliver another rate hike this year as it gathers more confidence that Japan will sustainably achieve its 2% price target. Therefore, the country’s trend inflation, wage growth and consumption data will hold more importance than the central bank’s quarterly inflation projections in determining the Bank’s future interest rate decisions.
Analysts at BBH preview the BoJ policy announcements, noting that “we are sticking to our view that the BoJ tightening cycle will remain very modest. The market agrees and is pricing in only 20 bp of tightening in 2024 and 50 bp over the next two years. Such a modest cycle would likely keep upward pressure on USD/JPY.”
“Updated macro forecasts will be released. Reports emerged suggesting the BoJ may raise its inflation forecast for FY2024 from 2.4% currently at this meeting. However, March CPI data last week came in lower than expected and suggests falling price pressures, so the revision is likely to be minor,” the analysts explained.
How could the Bank of Japan interest rate decision affect USD/JPY?
If the BoJ policy statement delivers a hawkish tone, indicating that the next rate hike could be as early as July, the Japanese Yen is likely to see a fresh upswing against the US Dollar (USD). The USD/JPY pair would then initiate a corrective downtrend toward the 150.00 level.
On the other hand, if the central bank suggests that they would cautiously monitor the likelihood of achieving 2% trend inflation to gauge the next rate increase, it could be read as dovish. In such a case, the Japanese Yen could crash to a new 34-year low against the US Dollar.
It’s worth noting that the Japanese Yen tends to weaken on BoJ decision days. It has done so for eight straight and nine of the past ten meetings, per BBH Analysts.
From a technical perspective, Dhwani, Senior Analyst at FXStreet, notes: “Amid extremely overbought Relative Strength Index (RSI) conditions on the daily chart, a USD/JPY correction seems long overdue. Should a hawkish BoJ guidance spark a Japanese Yen rally, the pair will pull back sharply toward the 21-day Simple Moving Average (SMA) at 153.19. Ahead of that level, the April 23 low of 154.55 could challenge bearish commitments. If the corrective decline gains traction, USD/JPY could accelerate toward the 50-day SMA at 151.28.”
“On the flip side, the relentless vertical rise could extend toward 156.50, with buyers aiming for the 160.00 level predicted by a senior Liberal Democratic Party official to be a probable intervention point for the Japanese authorities,” Dhwani adds.
Economic Indicator
BoJ Interest Rate Decision
The Bank of Japan (BoJ) announces its interest rate decision after each of the Bank’s eight scheduled annual meetings. Generally, if the BoJ is hawkish about the inflationary outlook of the economy and raises interest rates it is bullish for the Japanese Yen (JPY). Likewise, if the BoJ has a dovish view on the Japanese economy and keeps interest rates unchanged, or cuts them, it is usually bearish for JPY.
Read more.Next release: Fri Apr 26, 2024 03:00
Frequency: Irregular
Consensus: 0.1%
Previous: 0%
Source: Bank of Japan
Bank of Japan FAQs
The Bank of Japan (BoJ) is the Japanese central bank, which sets monetary policy in the country. Its mandate is to issue banknotes and carry out currency and monetary control to ensure price stability, which means an inflation target of around 2%.
The Bank of Japan has embarked in an ultra-loose monetary policy since 2013 in order to stimulate the economy and fuel inflation amid a low-inflationary environment. The bank’s policy is based on Quantitative and Qualitative Easing (QQE), or printing notes to buy assets such as government or corporate bonds to provide liquidity. In 2016, the bank doubled down on its strategy and further loosened policy by first introducing negative interest rates and then directly controlling the yield of its 10-year government bonds.
The Bank’s massive stimulus has caused the Yen to depreciate against its main currency peers. This process has exacerbated more recently due to an increasing policy divergence between the Bank of Japan and other main central banks, which have opted to increase interest rates sharply to fight decades-high levels of inflation. The BoJ’s policy of holding down rates has led to a widening differential with other currencies, dragging down the value of the Yen.
A weaker Yen and the spike in global energy prices have led to an increase in Japanese inflation, which has exceeded the BoJ’s 2% target. Still, the Bank judges that the sustainable and stable achievement of the 2% target has not yet come in sight, so any sudden change in the current policy looks unlikely.