In his final scheduled public address before the Bank of Japan's monetary policy meeting this month, Governor Kazuo Ueda sent a powerful signal regarding a potential interest rate increase. He explicitly stated that if the upside risks to inflation outweigh the downside risks to economic growth, the central bank must thoroughly debate the pros and cons of raising rates, a stance markets interpreted as the final push for action in June.
Speaking at a forum in Tokyo on Wednesday, Ueda pointed out that the significant energy shock from the Middle East conflict necessitates heightened vigilance against the risk of inflation overshooting. "Japan is in a phase where it is more susceptible to potential inflation overshooting due to secondary spillover effects from rising crude oil prices," Ueda said, adding, "We need to make future policy decisions based on this premise."
He further warned that the price pressures triggered by the energy shock might not be temporary and could push underlying inflation higher than the central bank's projections. If the economy and price trends align with the BOJ's baseline scenario, the central bank will continue to raise its policy interest rate "at an appropriate pace."
More crucially, he stated plainly, "Even with the uncertain outlook for the Middle East, if we judge that the upside risks to prices outweigh the downside risks to economic activity, we must fully discuss the pros and cons of raising the policy interest rate." When asked about the possibility of a June hike, he reiterated this position.
Governor Ueda's remarks indicate a high probability of a rate hike by the Bank of Japan this month, even if his phrasing was less direct than in the lead-up to the previous two hikes. This suggests that, amid high uncertainty surrounding the Middle East situation and the monetary policy stance of Prime Minister Takaichi Sanae, Ueda intends to preserve flexibility for future policy maneuvers.
Yusuke Miyairi, a foreign exchange strategist at Nomura International, noted that Ueda used similar language in a speech last December, after which the central bank raised rates that same month. "The BOJ appears to be proceeding methodically in preparing for a June rate hike," he said.
Following Ueda's speech, the U.S. dollar against the Japanese yen retreated from around the 160 level—its lowest since late April before the remarks—to approximately 159.85. Currently, traders are pricing in an approximately 85% probability that the Bank of Japan will raise rates by 25 basis points at its meeting on June 15-16. This would lift the benchmark rate from 0.75% to 1%, reaching its highest level since 1995. In a survey last month, nearly two-thirds of economists also anticipated the central bank would act in June.
Internal Consensus Narrows as Inaction Carries High Cost
Ueda's remarks come as the balance within the Bank of Japan's policy board is clearly tilting towards a more hawkish stance. At the April meeting, the central bank voted 6-3 to keep rates unchanged, the most divided vote under Ueda's leadership, with three board members advocating for a hike at that time. Since then, two members who previously supported holding steady have also warned of rising price pressures in recent comments, indicating growing support for a near-term rate increase.
In his speech, Ueda specifically highlighted the risks of hesitation. "If the central bank delays necessary action against inflation, it may later be forced to implement significant rate hikes, imposing a heavy burden on the economy, markets, and the financial system," he stated. He also noted that timely increases to Japan's still-low real interest rates could help convince markets that inflation will be contained, thereby curbing disorderly rises in bond yields.
Masayuki Nakajima, a senior foreign exchange strategist at Mizuho Bank in London, believes Ueda's comments show the BOJ is now focusing on the risk of falling behind the curve, shifting from its previous cautious posture to seemingly placing greater emphasis on inflation upside risks. Masato Koike, a senior economist at Sompo Institute Plus, stated bluntly, "Ueda sounds hawkish and eager to hike, and the likelihood of a June rate increase has risen significantly."
Data and External Pressures Force the Bank's Hand
Evidence compelling the Bank of Japan to accelerate its actions is also mounting. Wholesale inflation in April hit a three-year high, with the pace of corporate cost pass-through alarming policymakers. According to Teikoku Databank, food and beverage companies attempting to pass on higher input costs are likely to raise prices on over 10,000 items this year, marking the fifth consecutive year of such increases.
A weak yen is exacerbating the situation. The Middle East conflict is pushing oil prices higher, which not only weighs on the yen but also complicates the Federal Reserve's policy path. Markets are now even pricing in the possibility of a Fed rate hike before year-end, further pressuring the BOJ to narrow the interest rate differential with the U.S. to support its currency.
Japanese authorities spent a monthly record of 11.73 trillion yen (approximately $73.5 billion) on currency intervention between April 28 and May 27, but the yen's gains have gradually been eroded, intensifying concerns that imported inflation will continue to push prices higher.
Simultaneously, Japan's cabinet approved a 3.1 trillion yen (approximately $19.4 billion) spending plan on Wednesday aimed at funding subsidies to help households cope with inflation, highlighting the urgency felt by policymakers in tackling rising living costs.
At this month's policy meeting, in addition to deciding on interest rates, central bank officials will also discuss whether to continue its plan to reduce bond purchases by 200 billion yen per quarter in the next fiscal year, which will be another focal point for bond markets.
Jane Foley, a senior foreign exchange strategist at Rabobank, commented, "While no policy decision was made today, he clearly stated that a rate hike this month warrants serious discussion and concluded by expressing confidence in the Japanese economy's ability to withstand the current shocks. This leads me to believe he is very likely to support a rate hike this month."
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