MNI INTERVIEW: BOJ April Rate Hike Difficult - Ex-Chief Econ

The Bank of Japan will find it difficult to raise its 0.75% policy interest rate this month given heightened uncertainty over the Strait of Hormuz and the risk of a significant global economic slowdown, former BOJ chief economist and executive director in charge of monetary policy Kazuo Momma told MNI, adding the stance could shift rapidly should geopolitical risks subside. 

Momma, now executive economist of the Research Department at Mizuho Research Institute, an internal organisation of Mizuho Bank, said that although a hike at the April 27-28 meeting is unlikely, board members are actively discussing the risk of falling behind the curve, with some expressing concern about upside risks to prices. He added that if risks related to Iran ease, the BOJ could move quickly to raise rates, with a move as early as June and another increase later in the year possible.

“Judging from existing conditions, the BOJ must carefully consider raising the policy rate,” Momma said, adding the bank has sought to dampen market speculation over an April hike, with overnight index swaps now pricing a 59% probability, through a subdued assessment at its branch managers’ meeting. (See MNI POLICY: April BOJ Rate Hike In Doubt On Slowdown Fears) In its regional economic report released April 6, the BOJ warned of potential downward pressure on regional economies depending on future developments, alongside negative effects on consumer sentiment and supply constraints.

The BOJ is balancing slowing growth and rising inflation but is currently focused on downside risks to the economy, Momma continued, adding that supply constraints are driving substantial uncertainty and a pronounced downturn cannot be ruled out. The March Tankan survey confirmed that Japan’s economic fundamentals remain solid, with limited impact from past rate hikes and still-accommodative financial conditions, he said. However, the bank has yet to fully assess how the Middle East conflict will affect business activity going forward.

Momma expects the BOJ to maintain its view that underlying and core CPI inflation will be broadly consistent with its price stability target from around October this year to March 2028, with the projection horizon likely extended through fiscal 2028.

YEN FOCUS

Momma said yen weakness is likely to lead Governor Kazuo Ueda to maintain a tightening bias even after tail risks recede, which could help limit selling pressure on the currency. (See MNI INTERVIEW: Yen To Drive BOJ's Dec Hike Decision - Momma)

He highlighted the dollar/yen exchange rate as a key factor for policy decisions, noting Federal Reserve and European Central Bank moves will heavily influence the currency. “If the U.S. economy slows down or concern over slower economy strengthens, speculation over rate cuts will weaken yen selling pressure," Momma argued. "Meanwhile, if the U.S. economy is resilient, it will cause speculation over rate hikes, which will exert downward pressure on the yen. If it happens, the BOJ needs to raise the rate swiftly."

BANK SIGNALS

Momma noted recent BOJ studies released in late March, including a core CPI indicator and updated output gap estimates, were intended to facilitate future rate hikes rather than signal an imminent move.

A BOJ review of the natural rate of interest suggests the bank will assess the degree of monetary accommodation using a range of indicators, such as bank lending, asset prices and funding conditions, rather than relying on the natural rate itself, he continued. “The BOJ declared that the natural rate of interest isn’t an important indicator and the bank will not use the natural rate of interest anymore in managing monetary policy,” Momma concluded.