JP: Bank of Japan Announcement

Highlights

The Bank of Japan's nine-member board decided in a 6 to 3 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 meetings in March and 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.

The bank pointed to upside risks to inflation, given that underlying CPI inflation is approaching the bank's 2% target and firms' behavior is shifting more toward raising wages and prices.

Board member Hajime Takata, formerly with Mizuho Securities, called for a rate increase to 1.0% for the third 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. Naoki Tamura, who came from the Sumitomo Mitsui banking group, rejoined Takata in calling for a 25 basis point hike, saying the bank should set the policy rate as close to the neutral rate as possible as inflation risks are significantly skewed to the upside.

Junko Nakagawa, a former Nomura Securities executive, joined the chorus for a 25 bp hike, noting that upside risks to inflation are high under the current accommodative financial conditions.

The board repeated that it 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. 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 that began on April 1.

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.

While repeating its long-held view that Japan's economy should continue growing moderately, the BOJ continued to urge a close watch on the impact of the Middle East conflict on global financial markets.

In its quarterly Outlook Report issued after the April 27-28 meeting, the bank brought forward the timing of hitting the 2% inflation target, saying between the second half of fiscal 2026 and 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. For years, the bank continued to peg the timing to the second half of its projection period (in this case, from fiscal 2026 through fiscal 2028).

The median projections by the board from its quarterly Outlook Report:
FY26 core CPI (ex-fresh food) +2.8% vs. +1.9% in January
FY27 core CPI (ex-fresh food) +2.3% vs. +2.0% in January
FY28 core CPI (ex-fresh food) +2.0% (the first estimate)
FY26 GDP +0.5% vs. +1.0% in January
FY27 GDP +0.7% vs. +0.8% in January
FY28 GDP +0.8% (the first estimate)

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% in a majority or unanimous vote, pointing to the uncertainty generated by the Mideast conflict. It would follow “no change” decisions in an 8 to 1 vote in March and January. The bank conducted 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.

The board is likely to repeat that it 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.” 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 that began on April 1.

BOJ Governor Kazo Ueda wishes to keep expectations of higher interest rates alive even if the bank were to stand pat at the upcoming meetings. When the Trump administration imposed stiff import duties in April last year, BOJ policymakers waited patiently for about eight months for global trade row uncertainties to ease before deciding to raise rates.

Higher longer-term inflation expectations amid elevated energy costs are likely to boost underlying inflation, Governor Kazuo Ueda said in a recent speech. “Given that firms have become more assertive in their wage and pricing behavior in recent years, it is important to note that this inflationary mechanism may be stronger now than in the past,” he said, repeating the recent official line.

In March, 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.” Takata and his colleague Naoki Tamura, who came from the Sumitomo Mitsui banking group, were advocates for an earlier rate hike before December.

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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