The Governor of the Bank of Japan, Kazuo Ueda, has been admitted to hospital for treatment of an infected liver cyst, just days before the central bank's highly anticipated monetary policy meeting.
In a statement released on Wednesday, the Bank of Japan confirmed that Mr. Ueda will be absent from the two-day policy meeting scheduled for June 15-16 to undergo treatment. The 74-year-old governor is expected to remain hospitalized for approximately two weeks.
Recent public comments from Governor Ueda and other members of the policy board have led markets to widely anticipate that the Bank of Japan is almost certain to raise interest rates by 25 basis points next week, lifting the policy rate to 1%. This would mark the highest level in 31 years.
Following news of the governor's hospitalization, the Japanese yen weakened slightly. In Tokyo trading on Wednesday evening, the dollar rose against the yen to 160.50. The yen had previously fallen to this level in late April, prompting Japanese authorities to intervene in the currency market, spending a total of 11.7 trillion yen (approximately $73 billion) to support the domestic currency.
In a speech on June 3, Governor Ueda indicated that spillover effects from high oil prices could push core inflation higher than expected. Most economists interpreted this as a signal to the market that an interest rate hike was imminent.
Analysts believe that raising the rate to the symbolic 1% level represents a significant milestone and a crucial step by Governor Ueda in normalizing Japan's monetary policy, which has been characterized by ultra-low and even negative interest rates for decades.
The Bank of Japan stated that next week's policy meeting will be chaired by Deputy Governor Ryozo Himino, while the post-meeting press conference in the afternoon will be attended by the other deputy governor, Shinichi Uchida.
The central bank added that Governor Ueda will handle essential official duties remotely during his hospital stay.
Governor Ueda, who was appointed in February 2023 and was seen as an unconventional choice, is not a core figure within Japan's traditional political and economic establishment. Since taking office, he has steered the central bank through political instability brought by two changes of prime minister and has confronted a new era of persistent inflation following decades of stagnant or falling prices.
Markets had previously expected the Bank of Japan to raise rates to 1% at its April meeting, but the central bank ultimately paused, citing uncertainty over the situation in Iran and Japan's heavy reliance on Middle Eastern crude oil and commodities.
A Tokyo-based stock trader noted that with the press conference being led by a less publicly familiar official, it may become more difficult for outsiders to interpret the subtle nuances in the central bank's policy intentions.
Markets will be closely watching for any signals from the Bank of Japan regarding the neutral interest rate level. Recent remarks by policy board members have also fueled speculation about whether the bank will maintain its current pace in reducing its monthly purchases of Japanese government bonds.
With inflation remaining elevated and the yen persistently weak, many argue that the central bank's rate-hiking actions are overdue. Soichiro Nakamura, a Japan economist at Citigroup, stated that the Bank of Japan risks falling behind the curve but could reverse this perception if it hikes rates next week and signals that the tightening cycle will continue.
Marcel Thieliant, Head of Asia-Pacific at Capital Economics, forecasts that Japan's policy rate will reach 2% by the end of 2027 under Governor Ueda's tenure.
Economists at HSBC noted that pricing in the overnight index swap market suggests the Bank of Japan will implement another 25-basis-point hike this year following an expected move next week.
Izumi Devalier, Chief Japan Economist at Bank of America, observed that just a year ago, markets were intensely debating whether the Bank of Japan would stop raising rates at 1%, whereas now that level is seen merely as a waypoint.
She added, "The fact that markets are now discussing what happens beyond 1% shows how much the landscape has shifted."
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