MNI POLICY: BOJ To Assess March Hike On Strong Market View

The Bank of Japan is likely to consider raising its policy rate at the March 18-19 meeting should financial markets significantly price in a hike, as failing to act could weaken the yen – a development Japanese and U.S. authorities both view as undesirable, MNI understands.

BOJ overnight index swaps currently give a 24% chance of a move next month and over 50% odds of a hike at the April 27-28 meeting. 

While officials believe the Bank could more easily justify a move in April, after assessing a broader set of economic and financial data, there are concerns that holding off in March could create market friction, including renewed yen weakness and JGB selling pressure, reinforcing perceptions that the BOJ is falling behind the curve.

Further yen depreciation – with the currency falling another 2–4% year to date and prompting rare U.S. foreign-exchange rate checks to gauge potential spillovers to American financial markets – would raise import costs and inflation, increasing pressure on the BOJ to tighten, though an emergency policy meeting remains highly unlikely.

If the BOJ were to hike in March, JGB yields could decline and the yen strengthen, as markets would view the move as a timely and appropriate policy response. While the BOJ maintains it is no rush to hike at either the March or April meeting, it will continue to monitor market pricing via hearings, surveys and movements in OIS.

HIKING PACE

Rate increases have proceeded cautiously since the exit from negative rates, reflecting limited familiarity with rate hikes among firms and financial institutions, and earlier concerns about a return to deflation. 

Rapid hikes would also expand unrealised losses on JGB holdings at financial institutions, risking financial instability.

That said, the risk of Japan slipping back into deflation has diminished, allowing the BOJ to consider further hikes at regular policy meetings barring a major global shock.

Higher borrowing costs will weigh on indebted sectors – including households, small firms and real estate – but the macroeconomic impact is expected to be contained, as large corporations hold substantial internal reserves.

Markets will scrutinise Deputy Governor Ryozo Himino’s March 2 speech in Wakayama for signals on the likelihood of a March move.