MNI POLICY: April BOJ Rate Hike In Doubt On Slowdown Fears

Growing concerns over a slowdown in Asian economies and uncertainty about wage growth at smaller firms facing high energy costs are reducing the likelihood of a Bank of Japan rate hike this month, while officials are also wary that a move at the April 27-28 meeting could prompt government pushback, MNI understands.

Officials believe the Bank is unlikely to fall behind the curve if it refrains from raising the 0.75% policy rate this month, as underlying CPI is not expected to exceed concerning levels. They also see only a limited risk that the current moderate wage-price dynamic will turn into a self-reinforcing inflationary cycle, allowing the BOJ to maintain a wait-and-see approach. 

Meanwhile, concerns are mounting that Asian economies, which account for about 55% of Japan’s exports, could see their slowest growth since 2022 if the Iran war persists due to rising energy costs and supply‑chain disruptions.

While no speeches by Board members are scheduled ahead of the meeting, the BOJ will need to find some way to manage market expectations, with overnight index swaps pricing a 56% chance of a rate hike this month, down from around 70% following cautious signals from the Bank’s branch managers’ meeting. 

Recent BOJ reviews and working papers, though technical in nature and carrying no direct policy implications, have also been read by some market participants as evidence the Bank stands ready to act. Officials believe the Bank should have avoided releasing them if it had no intention of raising the policy rate at the April meeting.

Bank officials are also mindful that exchange-rate developments are now more likely than in the past to affect prices, with such moves potentially feeding through to underlying CPI via inflation expectations. Holding the policy rate could weaken the yen and put upward pressure on interest rates, although any such impact is expected to be temporary.

Whether the BOJ can raise the policy rate in June will depend on developments in economic and price conditions, in addition to the ongoing conflict in the Middle East.

GOVERNMENT INTERVENTION

BOJ executives are also keen to avoid a situation in which the government exercises its right to formally request a postponement of a policy decision until the next meeting. In August 2000, government representatives made such a request when then-Governor Masaru Hayami proposed ending the zero interest rate policy, although the request was ultimately rejected by a majority vote.

The episode strained relations between the government and the Bank.

If the BOJ were to raise rates this month without sufficient consultation, the government could again exercise this right. A rate hike could also draw criticism from the government’s Council on Economic and Fiscal Policy, where former BOJ Deputy Governor Masazumi Wakatabe, a prominent reflationist, is a leading member. Such criticism could influence future appointments of the BOJ governor and deputy governors, potentially complicating the Bank’s policy path.