MNI BOJ WATCH: Board Likely To Hold, Open June Hike Door

The Bank of Japan is likely to keep its policy rate unchanged at 0.75% at its April 27-28 meeting, amid heightened uncertainty over the outlook for economic activity and inflation, despite persistently low real interest rates continuing to argue for further tightening.

While uncertainty remains elevated, Governor Kazuo Ueda is expected to reiterate the bank’s stance of gradually raising the policy rate, citing low real rates and the need to ease yen-selling pressure, leaving the possibility of a June hike open. Markets see little risk of a move higher next week, but have priced a 62% chance of a move in June and a 1.25% policy rate by December. 

The Board has held the rate steady since it last hiked 25 basis points in December. (See MNI BOJ WATCH: Holds, But Ueda Signals Hike Likely Near)

OIL SHOCK

The BOJ sees upside risks to prices increasing on the back of high crude oil prices and a weak yen, but does not view these as requiring an immediate policy response. (See MNI POLICY: April BOJ Rate Hike In Doubt On Slowdown Fears)

Officials do not expect underlying CPI — a key focus for monetary policy — to accelerate sharply enough to warrant near-term action, as wage growth is unlikely to surge and trigger a wage-price spiral. Unlike last year’s rice-driven price increases, higher crude oil prices are broadly lifting firms’ costs, increasing pressure to raise prices, with current conditions allowing business to pass on costs more easily than before.

Simultaneously, officials are concerned that further rate hikes could have an outsized tightening effect, adding downward pressure on the economy. They are also closely monitoring private consumption, as elevated living costs weigh on sentiment, according to government data. A key focus is whether medium- to long-term inflation expectations rise sufficiently to lift underlying CPI. 

However, officials do not expect the wage-price cycle to turn into a self-reinforcing spiral, as wage growth is unlikely to exceed around 5%, broadly in line with recent outcomes.

Corporate profits are expected to come under pressure from higher crude oil prices, limiting firms’ capacity to raise wages, while labour unions are seen as lacking the leverage to secure significantly larger pay increases, suggesting wage growth is unlikely to exceed around 5%, broadly in line with recent outcomes, which would help contain inflation.

BELOW NEUTRAL

While the U.S. Federal Reserve and the European Central Bank are also likely to adopt a wait-and-see approach this month, their policy rates are already within estimates of neutral.

The Bank’s policy rate remains below the estimated neutral range of around 1.1%-2.5%, implying monetary conditions are still accommodative and supportive of inflation. This has prompted some board members to argue for a faster move towards the natural rate. 

In the Outlook Report, which the bank will publish alongside the decision, the median GDP forecast for the current fiscal year is expected to be revised down from January’s 1.0% due to higher crude oil prices, while the inflation forecast is likely to be revised up from 1.9%. Officials judge that the probability of the baseline scenario outlined in January has declined following the escalation of conflict in the Middle East, with risks to both economic activity and prices increasing.