A former Bank of Japan (BOJ) board member stated on Friday that the central bank is highly likely to raise its benchmark interest rate at the June meeting. This meeting will determine whether authorities can avoid falling behind the curve in the fight against inflation.
The expectation for a rate hike in Japan in June is intensifying. The former member, who served from 2016 to 2021, said in an interview, "They are very likely to raise rates this time. If they do not, policy will lag behind the curve. This meeting is crucial."
He added that the policy meeting scheduled for June 15-16 comes at a critical juncture for the BOJ. He believes that if the opportunity to hike rates is missed this time, the central bank may ultimately have to postpone the next rate hike indefinitely. The ongoing high uncertainty surrounding the situation in Iran further complicates policy adjustments.
These remarks were made as the Japanese yen was approaching the levels at which Japanese authorities intervened in the market last month. The depreciation of the yen has exacerbated inflationary pressures from rising import costs. Currently, traders estimate the probability of a BOJ rate hike on June 16 at approximately 78%.
Data released earlier on Friday showed that Tokyo's core consumer price index (CPI), which excludes fresh food, rose 1.3% year-on-year in May, below economists' expectations and marking the smallest increase in four years. Government subsidies were a primary factor in this slowdown in inflation.
The former member pointed out that the Tokyo data was influenced by technical factors and would not alter the BOJ's policy direction, as core inflation is likely to accelerate later this year. "Inflation could exceed 3% in the autumn or later. By then, would they rush to hike rates three times in a year? Probably not," he said, adding that a frequency of about two policy adjustments per year is more appropriate.
Japanese Prime Minister is seen as a potential obstacle to a BOJ rate hike, as she has consistently advocated for monetary easing. Last week, she hinted to BOJ Governor that when formulating the "correct" monetary policy, the government's measures aimed at mitigating the impact of inflation should be considered, which was effectively a gentle suggestion to keep rates unchanged.
However, the former member stated that given U.S. Treasury Secretary expressed support for a BOJ rate hike during his visit to Tokyo earlier this month, the Prime Minister is unlikely to intervene in the BOJ's policy adjustment this time. BOJ officials have indicated that even if rates are raised, financial conditions will remain accommodative. "Considering Japan-U.S. diplomatic relations, the government would likely have to accept a rate hike," the former member said.
The yen is widely seen as another key factor in the BOJ's interest rate decision. On Friday afternoon, the yen was trading at 159.34 per U.S. dollar, close to the level at which the Japanese government intervened to support the currency in April. The former member noted that if rates are not raised in June, the yen will weaken further, a situation that would likely anger the United States.
Japan's Ministry of Finance is scheduled to release data later on Friday disclosing the scale of funds used for market interventions to stabilize the yen between April 28 and May 27. The data will not specify the number of interventions or exact dates, but sources confirmed that one round of intervention occurred on April 30, and the market speculates there were multiple operations in the following days.
It has been reported that the U.S. Treasury Secretary has long criticized the Japanese government for supporting the yen through foreign exchange market interventions (such as buying yen), arguing that the BOJ should address yen depreciation through monetary policy measures like rate hikes, rather than direct market operations.
The assessment of the bond purchase program is also a key focus of the June meeting, following a significant rise in Japanese government bond yields. A key question is whether the BOJ will continue to reduce its monthly bond purchases by 200 billion yen per quarter in the fiscal year starting April 2027. At the current pace of reduction, monthly purchases would fall to 2.1 trillion yen (approximately $132 billion) by March of next year.
The former member suggested that, considering recent bond market volatility and the progress the BOJ has already made in reducing its balance sheet, the reduction in bond purchases could potentially be halted next year, maintaining the pace at 2.1 trillion yen. The size of the BOJ's balance sheet has shrunk by about 13% from its peak, currently standing at approximately 663 trillion yen.
"Both options are acceptable to me, but I don't think there is a need to continue reducing purchases at this stage. However, raising interest rates is absolutely the top priority now," the former member concluded.
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