JP: Bank of Japan Announcement

Highlights

The Bank of Japan's nine-member board decided in an 8 to 1 vote to leave the target for the overnight interest at 0.75% after leaving it unchanged in an 8 to 1 vote at its previous meeting in January and conducting its first rate hike in six meetings in December by raising it by 25 basis points (0.25 percentage point) to a 30-year high in a unanimous vote. This follows the Bank of Canada's decision to hold its target for the overnight rate at 2.25% on Wednesday. The U.S. Federal Reserve also left the target range for the federal funds rate unchanged in a range of 3.50% to 3.75%.

One of the two deputy governors, Shinichi Uchida, attended the two-day policy meeting on March 18-19 via conference call from his hospital room as he did in January. He joined the December meeting by conference call from his office at the bank. Uchida, 63, a career central banker, was diagnosed to have leukemia in November. He has been executing his duties while receiving treatments.

The BOJ has been lifting the policy rate only gradually toward a more neutral level of at least 1%, noting that many firms are likely to continue raising wages into fiscal 2026 staring in April and uncertainties over U.S. trade rows have eased. The board repeated its mantra that the bank will continue raising rates if growth and inflation evolve in line with its medium-term outlook, noting that real interest rates are at significantly low levels.

While repeating its long-held view that Japan's economy should continue growing moderately, the BOJ specifically urged a close watch on the impact of heightened tensions in the Middle East on global financial markets that have become volatile as well as oil prices that have risen significantly since the U.S. and Israeli forces bombed Iran on Feb. 28, killing Supreme Leader Ali Khamenei and many Iranian officials. This triggered retaliatory attacks against Israel, U.S. bases and Gulf states and prompted Tehran to block the Strait of Hormuz, the key shipping route for oil and gas exports from the Mideast Gulf to the world. The board still believes that a positive cycle from income to spending will gradually intensify, backed by the government's economic stimulus packages and accommodative financial conditions resulting from the BOJ's large-scale easing in the past.

The BOJ now listed developments in the Middle East and oil prices at the top of the risks to watch while repeating to warn about the existing risk factors: global growth, inflation that are impacted by trade rows, wage- and price-setting behavior of firms and fluctuations in financial and foreign exchange markets. Stock markets have been on a roller coaster ride, reacting to a daily change in investor views on how the Iran war will affect growth and inflation. Japan's purchasing power has also been limited by the lingering weakness of the yen that keeps import costs high.

Board member Hajime Takata, formerly with Mizuho Securities, called for a rate increase to 1.0% for the second meeting in a row, arguing that the bank's 2% inflation target has been largely achieved and that Japan's inflation risks are skewed to the upside due to second-round effects of price rises stemming from overseas developments. His motion was voted down by the rest of the board, as was in January. Takata and his colleague Naoki Tamura, who came from the Sumitomo Mitsui banking group, were advocates for an earlier rate hike before December.

The board repeated its projection provided in its quarterly Outlook Report released after the January meeting that in the second half of its projection period (fiscal 2025 through fiscal 2027), underlying CPI inflation and the rate of increase in the core CPI (excluding fresh food) should increase gradually and will be at a level that is generally consistent with the price stability target.

The two known hawks, Takata and Tamura, argued against this outlook. Takata repeated his view that both underlying inflation and actual price rises in the consumer price index have largely reached the BOJ's 2% stability target. For his part, Tamura expects underlying inflation to reach the levels consistent with the 2% target at the April start of fiscal 2026, much earlier than the board's majority projection that has been held since April 2025.

The bank will update the board's medium-term inflation and growth forecasts as well as risk analysis in its quarterly Outlook Report to be issued after the next policy meeting on April 27-28. Many economists expect the BOJ to hold interest rates for now while confirming the effects of higher costs of energy and commodities as the Strait of Hormuz remains effectively shut by Iran.

Market Consensus Before Announcement

The Bank of Japan’s nine-member board is expected to leave the target for the overnight interest at 0.75% after leaving it unchanged in an 8 to 1 vote in January and conducting its first rate hike in six meetings in December, when the board decided unanimously to raise it by 25 basis points (0.25 percentage point) to a 30-year high on growing signs of rising wages and easing uncertainties over U.S. trade rows.

The BOJ has been lifting the policy rate only gradually toward a more neutral level of at least 1%, noting that many firms are likely to continue raising wages into fiscal 2026 staring in April and uncertainties over U.S. trade rows have eased. The board is expected to repeat its basic stance that the bank will continue raising rates if growth and inflation evolve in line with its medium-term outlook, noting that real interest rates are at “significantly low levels.”

BOJ Deputy Governor Ryozo Himino made it clear in a March 2 speech that the central bank would not be in a hurry to raise interest rates just because there is a supply-side shock to the economy, as in a spike in energy costs. Monetary policy action takes about 12 months to have a full impact on the economy, which means it could adversely affect growth instead of guiding inflation lower. “It is therefore often more prudent to confirm underlying inflation when responding to supply shocks,” he concluded.

At the previous meeting on Jan. 22-23, board member Hajime Takata, formerly with Mizuho Securities, called for a back-to-back rate increase to 1.0%, arguing that the bank’s 2% inflation target has been “largely achieved” and that there are “high upside risks” to domestic inflation as other economies are entering a recovery phase. Takata and his colleague Naoki Tamura, who came from the Sumitomo Mitsui banking group, were advocates for an earlier rate hike before December.

In its quarterly Outlook Report issued after the January meeting, the bank repeated its view that in the second half of its projection period (fiscal 2025 through fiscal 2027), underlying CPI inflation and the rate of increase in the core CPI (excluding fresh food) should increase gradually and will be “at a level that is generally consistent with the price stability target.”

Definition

The Bank of Japan is the central bank of Japan. The Bank of Japan Act states that the bank's monetary policy should be aimed at"achieving price stability, thereby contributing to the sound development of the national economy." The nine-member policy board reviews economic conditions at home and abroad before making a policy decision. There is no specific time for the announcement. The board holds eight two-day Monetary Policy Meetings a year, in January, March, April, June, July, September, October and December. At each meeting, the board votes on the proposals on the bank’s monetary policy stance and the basic guideline on how to achieve the policy target submitted by the chair of the board, who is the bank governor.

Description

The announcement of the bank’s monetary policy decision after each meeting can cause a market reaction, even when there is no change to the policy stance. Markets tend to look ahead toward a policy shift, pricing in a change to the bank’s targets for overnight and long-term interest rates, the pace of financial asset purchases or the scale of market operations.

Market participants closely monitor the news conference by the BoJ governor that usually starts at 1530 JST (0130 EST/0230 EDT/0630 GMT), a few hours after the bank releases its policy decision. Comments from the governor could provide clues to what the bank may or may not do in the near term, which in turn could trigger buying or selling of the yen against the dollar.

Since April 2023, the bank has been conducting a"broad-perspective review" of the costs and benefits of its various monetary easing measures implemented in the past 25 years. The negative overnight interest rate target introduced in January 2016 has been unpopular among lenders as it squeezes their profit margins.

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