MNI BOJ WATCH: Ueda Points To Hikes, Gives No Clues On Timing

Bank of Japan Governor Kazuo Ueda on Friday indicated that future rate hikes are likely, with real interest rates at significantly low levels, but provided no hints as to their timing or pace, and reaffirmed a commitment to intervene in bond markets should yields move at an exceptional rate.

“Our stance hasn’t changed that the Bank will raise the policy rate to adjust the degree of easy policy if the outlook for the economy and prices is realised,” Ueda told reporters after the BOJ’s board decided eight-to-one to keep the policy interest rate unchanged at 0.75%, saying it continues to assess the impact of December’s rate hike on economic activity and the financial environment.

Hajime Takata was the sole dissenter, calling for the policy rate to rise to 1.00% and citing upside risks to prices.

Ueda said the financial environment remains accommodative after December’s rates move. But his lack of specificity regarding the pace of hikes initially weakened the yen, sending it briefly to 159 to the dollar before it recovered to around 158.

YEN WEAKNESS

The  currency has depreciated since Prime Minister Sanae Takaichi took office in October, when it was at 147 against the dollar.

“I wouldn’t comment on levels of forex. Generally speaking, the forex rate is determined by interest rate differentials and other factors,” Ueda said. But he added that the weak yen will boost import prices, which will filter through to domestic prices and could affect price expectations at a time when underlying CPI inflation is already approaching to 2% target. (See MNI POLICY: BOJ Sees Risk Stronger Wages Fuel Faster Hikes)

While Japanese companies are becoming more willing to raise prices, with price revisions in or after April an important but not decisive factor for the BOJ’s rate decisions, movements in the yen are more likely than previously to impact inflation, Ueda said.

BOND SELL-OFF

Referring to the recent surge in Japanese government bond yields, Ueda said the BOJ will conduct JGB operations in a flexible manner should yields move in an exceptional manner, but he did not elaborate as to what the Bank would regard as exceptional.

“We remain in close contact with the government, and the BOJ and the government will each play a role against any rapid moves in JGBs,” he said, adding “It is very important for the government to ensure fiscal discipline.” (See MNI POLICY: BOJ Sees Little Chance Of JGB Intervention)

The end of the fiscal year has been behind the recent rise in very long-term JGB yields, Ueda said, adding that despite a recent fall high volatility continues.

 “Long-term interest rates are rising rapidly. They reflect market players’ views on the economy, inflation and the outlook for monetary policy.”

Amid concern over an increase in JGB issuance, the 10-year JGB yield rose to 2.380% on Tuesday, the highest level since February 1999, and 20-, 30- and 40-year yields climbed.

The BOJ slightly raised its inflation forecasts for fiscal 2026 but largely retained its view for fiscal 2027. Median forecasts for core and core-core CPI for fiscal 2026 were revised to +1.9% and +2.2% from October’s 1.8% and 2.0%, respectively. The median forecast for core and core-core CPI for fiscal 2027 were 2.0% and 2.1%, versus 2.0% and 2.0%.

But the BOJ now expects core CPI to fall below 2% more quickly, in the first half of this year instead of only the first half of fiscal 2026.

“Risks to economic activity and prices are generally balanced,” the BOJ said.

It maintained the view that underlying CPI inflation and the rate of increase in CPI are likely to hit the target in the second half of the projection period.