Markets widely expect the Bank of Japan to keep interest rates unchanged at its meeting on Tuesday, April 28th, posing a significant communication challenge for Governor Kazuo Ueda as the struggling yen hovers near levels that previously triggered government intervention.
Just weeks ago, markets and economists were betting that Ueda and his board would continue their normalization efforts with another rate hike following the conclusion of their two-day meeting. However, these expectations have largely evaporated following a surge in oil prices prompted by military actions involving the US and Iran. Market pricing now indicates only a 7% chance of a rate hike this week, with many economists shifting their forecasts to predict an increase in June.
Barring any surprises—a possibility that cannot be ruled out given that final decisions are often made at the last minute—attention will quickly turn to the policy signals from Governor Ueda. The policy statement is typically released around noon Tokyo time, followed by a press conference from the governor at 3:30 PM.
"The key point will be how forcefully the Bank of Japan communicates its determination to continue raising interest rates to curb yen depreciation," said Shigeto Nagai, former head of the BOJ's international department. In early Tokyo trading on Monday, the yen traded near 159.50 against the US dollar, not far from the level that prompted authorities to intervene and support the currency earlier this year.
Last Thursday, Japan's Finance Minister Shunichi Suzuki warned that officials are maintaining 24-hour close contact with their US counterparts, as Japan remains highly vigilant against speculative activities driving down the yen.
A Bloomberg Economics report suggested, "Pressure from the pro-stimulus government led by Sanae Takaichi to keep rates on hold could lead to a postponement of the rate hike plan... Maintaining rates deep in stimulative territory amid an inflationary shock from the Middle East damages the central bank's independence. We anticipate a rate hike in June."
Last week, sources indicated that the BOJ is leaning toward maintaining its policy rate at 0.75% due to uncertainties stemming from the conflict involving Iran. Officials reportedly remain committed to raising borrowing costs eventually. However, differing views suggest that divisions among the board's nine members could widen; the previous decision in March to hold policy steady was passed by an 8-1 vote.
Volatility related to the conflict has increased uncertainty regarding energy costs and supply chain resilience, making it difficult for policymakers to proceed decisively with the next rate hike. "There is a limit to how hawkish the BOJ can appear in its communication," said Naka Matsuzawa, chief strategist at Nomura Securities. "It's unclear whether Japanese authorities can contain yen depreciation and a steepening bond yield curve before the next meeting in June."
Last week, implied volatility on three-month yen options fell to a two-year low, as speculation over potential intervention limited downside risks. Market participants vividly recall Ueda's press conference following the April 2024 policy hold. His remarks on the yen were interpreted as dovish, triggering a sharp sell-off that ultimately led to intervention by authorities a few days later. Ueda will be keen to avoid a repeat this week.
The Federal Reserve and the European Central Bank are also holding policy meetings this week, with both widely expected to keep their settings unchanged. Pressure on the BOJ to continue its monetary normalization stems partly from the persistent policy divergence with other major central banks and the fact that real interest rates, adjusted for inflation, remain deeply negative.
The latest quarterly economic outlook report, due alongside the policy statement, should provide a basis for its ongoing hawkish stance. Sources indicated earlier this month that the BOJ board is likely to consider a significant upward revision to its price forecast for the current fiscal year, which began this month; the previous projection was 1.9%.
"Given increasingly aggressive corporate pricing behavior and intensifying yen depreciation pressures, we see the risks to price pressures as skewed more to the upside than the risks of a shock to economic growth," said Shotaro Morishi, senior economist at SBI Shinsei Bank Ltd.
Data released last Friday showed Japan's inflation rate accelerated in March for the first time in five months. A separate indicator showed the services producer price index rose 1.25% month-on-month, the largest increase in about 36 years, excluding periods of sales tax hikes. Meanwhile, consumer confidence suffered its largest drop since the COVID-19 pandemic, signaling a potential imminent hit to demand.
The median forecast from analysts suggests the BOJ will lower its growth forecast for this year to 0.8% from 1.0%. "Observing how the economic outlook is revised will be crucial for assessing how policymakers view the downside risks to growth from rising oil prices, and in turn, the impact of those risks on underlying inflation," said Naoya Hasegawa, chief bond strategist at Okasan Securities.
Governor Uada entered the fourth year of his term this month. During his tenure, he has scrapped yield curve control, ended negative interest rates, and raised the policy rate to its highest level in three decades. "He has only two years left," said former BOJ chief economist Toshitaka Sekine. "He has done what needed to be done, and he will continue to do so if necessary."
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