The Bank of Japan's messaging has left traders with the impression that a benchmark interest rate hike remains likely this month, despite the authorities citing Middle East conflict as a source of uncertainty. The critical question is whether the central bank will issue a clear signal before acting, as it has done in recent instances. There may be few opportunities to do so before the April 28 policy decision. The bank has no scheduled major speeches by policy board members this month, and Governor Kazuo Ueda's sole public address is set for April 13, where he will appear as one of several keynote speakers at a conference—a setting that typically yields only brief remarks. How the BOJ communicates its policy intentions ahead of the April meeting is crucial. Traders currently assign roughly a 70% probability to a rate hike. Such elevated expectations imply that a hike would not come as a surprise, whereas standing pat could jolt global markets already under pressure from the situation involving Iran. Under Governor Ueda's leadership, the BOJ has not held steady when market expectations strongly favored action. Overnight index swap data show that since the bank began raising rates in March 2024, the highest probability traders assigned to a hike on the day before a policy decision—in all cases where rates were kept unchanged—was just 20%. This suggests that if the BOJ does not intend to raise rates in April, it must quickly guide market expectations downward. Conversely, if the bank makes no attempt to temper expectations, it would serve as a strong signal that a hike is imminent. To some extent, the BOJ has already offered hints. Starting last week, it released new data on underlying inflation, the output gap, and the so-called natural rate of interest—all of which broadly support the case for further tightening. The summary of opinions from the March meeting also pointed toward a rate increase.
Comments