According to informed sources, officials at the Bank of Japan are considering raising the benchmark interest rate by 25 basis points this month and believe a further rate hike may be possible later in the year.
The central bank is likely to discuss raising its policy rate to 1% at the monetary policy meeting concluding on June 16. Officials also see room for additional hikes, given that real interest rates remain low and upside risks to inflation persist.
Due to high uncertainty surrounding the Middle East situation, officials will sift through as much data and information as possible until the last moment before making a final decision. Sources indicate that while some dissenting voices against a rate hike may emerge within the meeting, they are unlikely to sway the outcome.
A major focus of this meeting will also be the Bank of Japan's latest plan for scaling back its government bond purchases. Sources say officials see reduced necessity to continue the current pace of tapering from April next year.
The Bank of Japan's policy meeting is scheduled for June 15-16. Based on overnight swap trading data, markets have priced in an 88% probability of a rate hike then. One factor supporting this expectation is the strong possibility that the ongoing Middle East crisis will accelerate inflation.
Following the reports, the Japanese yen strengthened briefly, with the USD/JPY rate touching 159.61, after hovering above the 160 level earlier in the session. The yen's persistent weakness, lingering near levels that prompted Japanese authorities to intervene with $74 billion to support the currency since late April, has further fueled market expectations for central bank action.
In 2024, when Japan began intervening in late April to prop up the yen, the Bank of Japan did not raise rates at its June meeting. A second round of intervention followed in July, after which the bank finally hiked rates later that month.
In his final scheduled public remarks before the policy meeting on Wednesday, Bank of Japan Governor Kazuo Ueda hinted at a high probability of a June rate hike. He stated that if the risks of prices exceeding expectations outweigh the risks to the economy from the U.S.-Israel-Iran conflict, the central bank would need to consider raising rates. His comments boosted bank stocks on Thursday.
At the Bank of Japan's April meeting, Governor Ueda already faced three dissenting votes in favor of a rate hike. Since then, two other board members have publicly expressed support for further policy normalization. This suggests he would likely have majority support within the nine-member board if he decides to proceed with a hike.
This would be the first rate hike since December of last year. Although the benchmark rate would reach its highest level since 1995, it would remain the lowest among major economies.
Ahead of the Bank of Japan meeting, markets widely expect the European Central Bank to raise rates next week to combat inflationary pressures. The U.S. Federal Reserve, at its first meeting chaired by new Vice Chair Kevin Warsh on June 17, is likely to hold steady.
Traders will also watch whether Prime Minister Sanae Takaichi attempts to signal opposition to a Bank of Japan hike—she is known for supporting monetary stimulus. However, in a parliamentary speech on Wednesday, she merely reiterated that the details of monetary policy should be left to the central bank.
Toichiro Asada, the first Bank of Japan board member nominated by Takaichi, is a well-known reflationist. Observers will closely watch whether he supports any rate hike decision.
A potential argument against a June hike is the current strength of prices. Core inflation, excluding fresh food, has fallen back below the Bank of Japan's 2% target, primarily due to government price measures and base effects from last year's sharp food price increases.
The Bank of Japan expects inflation to heat up later this year as the effects of the Middle East conflict gradually feed through to prices. Governor Ueda said on Wednesday the indicator could reach 3% this fiscal year.
"Based on data and anecdotal information obtained so far, upside risks to prices are generally larger overall and could materialize sooner," Ueda stated.
Bond Purchase Plan
The Bank of Japan will also announce its latest government bond purchase plan at this meeting. Currently, the bank is reducing its purchase volume by 200 billion yen (approximately $1.3 billion) per quarter until March next year.
The current tapering pace has already slowed significantly, mainly due to concerns that a too-rapid exit could trigger bond market turmoil. For over a decade, the Bank of Japan has been the largest buyer of Japanese government bonds and still holds about half of the country's outstanding debt.
Sources say policymakers believe the functioning of the Japanese government bond market has improved, so they may consider slowing the tapering pace or even pausing it entirely. Authorities have reportedly been soliciting opinions from market participants to ensure they fully understand the central bank's stance on its bond purchases.
Sources indicate that regardless of whether the tapping continues at the current pace, the Bank of Japan's bond holdings will decline significantly due to the scale of bond redemptions. By March 2027, the bank's monthly bond purchases will fall to 2.1 trillion yen. Before the former governor launched the massive easing program in 2013, the bank purchased about 1.8 trillion yen in bonds per month.
Comments