Source: Golden Ten Data
The Bank of Japan will announce its interest rate decision this week. It is closely monitoring the core inflation rate, and further interest rate hikes are unlikely.
According to an overnight report by Nikkei News, Bank of Japan policymakers are expected to focus on discussing the impact of the rapid weakening of the yen on inflation, and speculation about the timing of the Bank of Japan's next rate hike is raging. Affected by this news, the dollar fell to an intraday low of 154.55 against the yen in the US market on Tuesday.
This will be the first policy committee meeting since the Bank of Japan ended its negative interest rate policy in March this year and raised interest rates for the first time in 17 years. The Bank of Japan also ended yield curve control aimed at keeping the 10-year Japanese Treasury yield close to zero. However, the Bank of Japan is still under pressure from the recent depreciation of the yen. As of this Tuesday, the exchange rate of the yen against the US dollar has fallen by about 5% from when the March Policy Committee meeting was held.
Most market observers do not expect the Bank of Japan to make further policy adjustments at the upcoming meeting. In the monthly survey released by QUICK on April 15, 22% of respondents predicted the next rate hike would be in October, and 18% predicted September. Only 2% think interest rates will be raised again in April.
According to Nikkei News, the Bank of Japan is keeping a close eye on core inflation as it weighs the timing of further rate hikes. Its goal is not to rush into further adjustments, but rather to carefully monitor small businesses' efforts to raise wages and pass on the increased costs to consumers.
“We want to confirm that the cycle between wage and price growth is strengthening,” a Bank of Japan source said.
Inflation takes time to reflect changes in exchange rates. Many at the Bank of Japan believe that the weak yen is not currently increasing inflation. Bank of Japan Governor Kazuo Ueda told lawmakers on Tuesday that the core inflation rate was “slightly below 2%,” implying reservations about further interest rate hikes.
The Bank of Japan will announce its quarterly outlook on economic activity and prices at an upcoming meeting. This will include the first forecast for the 2026 core consumer price index (excluding fresh food) growth, which is expected to be around 2%.
Policymakers will also discuss whether to raise the January forecast for the 2024 core inflation rate of 2.4% based on weak yen, rising resource prices, and other factors. Any remarks about the Bank of Japan's purchase of Japanese treasury bonds will also be closely watched.
The yield on the benchmark 10-year Japanese Treasury bond rose by about 15 basis points from March and reached the 0.88% range on Tuesday. A Bank of Japan source said, “The rise in long-term interest rates will help prevent the yen from weakening further.”
Following the March meeting, Kazuo Ueda said that the Bank of Japan has returned from quantitative and qualitative easing to a “normal monetary policy.” However, the Bank of Japan is still planning to continue buying Japanese treasury bonds at a similar rate. Kazuo Ueda said that the Bank of Japan will eventually reduce purchases of Japanese treasury bonds, but there is currently no specific schedule.
The Bank of Japan holds most of the outstanding Japanese treasury bonds, excluding treasury bond discount notes. The bank is expected to continue buying in line with its established monetary policy to prevent interest rates from soaring. Some market observers have predicted that the Bank of Japan will reduce the scale of debt purchases. The Bank of Japan needs to lay the foundation for this by clarifying its intentions to the market through speeches by Kazuo Ueda and other senior officials and other information released.
Editor/jayden