The Bank of Japan has maintained its target interest rate at 0.75%, marking the third consecutive meeting without a policy change, a decision that aligned with market expectations. The central bank assessed that risks to Japan's economic outlook are skewed to the downside, while inflation risks are tilted to the upside. Within the nine-member policy board, three members voted for an interest rate hike, citing rising inflation risks. The BOJ stated that real interest rates remain very low and that it will guide monetary policy appropriately from the perspective of sustainably and stably achieving the 2% price target.
Regarding economic projections, the BOJ expects Japan's economic growth to slow in fiscal year 2026 before picking up modestly from fiscal 2027 onward. The median forecast for real GDP growth is 0.5% for FY2026 (down from a 1.0% projection in January), 0.7% for FY2027 (compared to 0.8% previously), and 0.8% for FY2028. For core consumer inflation, the median forecast is 2.8% for FY2026 (up from 1.9% in January), 2.3% for FY2027 (versus 2.0%), and 2.0% for FY2028.
The central bank indicated it will carefully consider the timing and pace of future policy adjustments while closely monitoring the impact of Middle East developments on the economy and prices. It also emphasized the need to be vigilant about the risk of inflation significantly overshooting the target, given changes in corporate wage and pricing behavior.
Market attention is now focused on the possibility of a rate hike in June. A recent media survey showed that about three-quarters of economists believe upside risks to underlying inflation outweigh downside risks, partly due to Middle East geopolitical conflicts. While the BOJ stood pat this week, it is expected to be forced to accelerate the pace of future rate hikes. 57% of economists surveyed pinpoint June as the most likely timing for the next hike. The median forecast for the policy rate by year-end has been revised up to 1.25% from 1.0% previously.
Analysts provided varied perspectives. Société Générale's chief Japan economist suggested a June hike is likely, but warned it could be delayed until July if tensions between the US and Iran persist and the Strait of Hormuz remains closed. An economist from Sumitomo Mitsui Trust Asset Management noted that the BOJ's policy stance remains biased toward tightening, and the chance of a June or July hike would rise if Middle East tensions ease. A bond analyst from Mitsubishi UFJ Morgan Stanley Securities highlighted that markets will closely watch the strength of any signals from Governor Kazuo Ueda regarding a June move, as his comments will influence policy rate path expectations.
Following the policy announcement, which included hawkish rhetoric on inflation, the Japanese yen strengthened against the US dollar by approximately 30 basis points. This was in line with analyst expectations, as a survey had indicated that analysts anticipated the BOJ would use hawkish language to support the yen, given that the USD/JPY rate had again approached the 160 level ahead of the decision.
The possibility of currency intervention by Japanese authorities remains. Before the decision, Finance Minister Shunichi Suzuki stated that authorities are prepared to take necessary action in response to forex market moves under any circumstances. Despite the brief rally, the USD/JPY pair was still trading around 159.10, near levels that triggered intervention by Japan in 2024. A Commerzank report cautioned that if the BOJ maintained rates and expressed caution on future hikes, the yen could weaken further, and warnings from the Ministry of Finance about intervention would "no longer be of much help," potentially pushing USD/JPY above 160.
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