The Bank of Japan is set to raise interest rates to a 31-year high of 1% on Tuesday, marking another landmark step in normalizing monetary policy as it focuses on taming price pressures from the energy shock caused by the Iran war. This would be the first rate hike since December and align the BOJ with other central banks shifting towards tighter policy to combat inflation, including the European Central Bank. The hike would bring the BOJ's policy rate around the bottom of its estimated 1.1%-2.5% range seen as levels deemed neutral to the economy, with the central bank taking borrowing costs to levels unseen since 1995. Economic Revitalisation Minister Minoru Kiuchi told a news briefing on Tuesday that he hopes the BOJ communicates and works closely with the government in seeking to stably hit its price goal, while attending Tuesday's meeting as one of two government representatives who cannot vote but express views to the board.
Bank of Japan Governor Kazuo Ueda's hospitalization for medical treatment has created a historic milestone, marking the first time a BOJ governor has missed a scheduled policy meeting since the central bank began deciding policy under the current arrangement in 1998. According to CNBC, Ueda entered the hospital on June 10 for treatment of an infected liver cyst and is expected to remain in hospital for about two weeks. Deputy Governor Ryozo Himino will chair the rate review in his place, while Deputy Governor Shinichi Uchida, recently diagnosed with leukemia, will conduct the post-meeting press conference. Ueda, 74, will not vote in the decision, leaving the decision in the hands of eight board members - seen mostly in favour of a rate hike. The hospitalization is not expected to affect next week's decision, but will significantly complicate the BOJ's communication about its future trajectory of rates.
The Middle East conflict has complicated the BOJ's policy path by adding inflationary pressure through higher oil costs, while hurting an economy heavily reliant on imported fuel. Wholesale inflation spiked to a 3-year high of 6.3% in May, while wholesale prices rose 4.9% year-over-year in April. Despite government subsidies keeping core consumer inflation below the BOJ's 2% target, analysts expect price pressures to broaden. The BOJ kept policy steady at its previous meeting in April but sharply revised up its price forecasts and stressed its vigilance to the risk of inflation overshoot, with three of its nine board members proposing a hike to 1%. A weak yen, which pushes up import prices and broader inflation, will also keep the BOJ under pressure to stay on course for further rate hikes, analysts say.
A Reuters poll of economists has confirmed that the Bank of Japan will raise its key interest rate to 1.0% by the end of June, with 94% of respondents forecasting this move. This represents a significant increase from 65% in the May survey, as reported by Reuters. The poll shows all but one of 70 respondents expect the rate to reach at least 1.0% by the end of September. Looking further ahead, more than three-quarters of respondents, 53 of 67, expect the BOJ to raise rates to 1.25% in the fourth quarter, with two-thirds of economists now forecasting the policy rate to reach 1.50% in the second quarter of next year. Deputy Governor Shinichi Uchida is expected to hold a press briefing after the meeting, which Ueda will miss for hospital treatment. Former BOJ top economist Seisaku Kameda predicts Uchida will signal the BOJ's readiness to respond nimbly to market conditions, noting that "Uchida is good at communicating with constructive ambiguity."
The yen was little changed at 160.52 per dollar as of latest trading, leaving traders on edge about the possibility of official intervention from Tokyo. Japan's 10-year bond futures for September added 4 ticks to 127.51. Carol Kong, a currency strategist at Commonwealth Bank of Australia, stated that "a 25-basis-point hike still looks all but certain. The bigger question for markets is how Uchida handles the press conference." With the yen hovering around the critical 160-per-dollar level that could trigger intervention, analysts say any delay in policy tightening could put further downward pressure on the Japanese currency. If the BOJ delivers the expected hike, it should help reassure investors about the BOJ's independence and give policymakers some breathing room as they assess when to next raise rates. The BOJ's cautious approach to rate hikes has been weighing on the yen due to the large interest rate differential between the US and Japan.
