JP: Bank of Japan Announcement

Highlights

The Bank of Japan's nine-member board minus Governor Kazuo Ueda decided to raise the target for the overnight interest rate to 1% from 0.75% in a 7 to 1 vote at its June 15-16 meeting, as largely expected, amid growing upside risks to inflation triggered by the Mideast conflict and as part of the process to unwind large-scale monetary easing. As previously announced, Governor Ueda missed the meeting for medical treatment. He submitted his opinions in writing but did not vote.

Board member Toichiro Asada, a former economics professor who joined the policy-setting panel in April, voted against the rate hike, arguing that downside risks to production and employment are greater than upside risks to inflation. His appointment reflects the wishes of Prime Minister Sanae Takaichi who has voiced opposition to rate hikes in the past.

It is the bank's fifth rate hike in the current cycle and the first since December, when the board unanimously decided to raise the policy rate by 25 basis points (0.25 percentage point) to 0.75%, a 30-year high after standing pat for nearly a year while waiting for the uncertainty created by protectionist U.S. trade policy to ease.

The bank gave two reasons to justify the rate decision. Downside risks to a sharp slowdown in the economy have decreased compared to a while ago, thanks to energy subsidies and alternative sources of raw materials from the Middle East, while there is a risk of underlying consumer inflation deviating upward above the bank's target to guide inflation to around 2% in a sustained and stable manner.

Looking ahead, the bank said it will continue to raise the policy interest rate and adjust the degree of monetary accommodation in response to developments in growth and inflation, noting that underlying consumer inflation is nearing the bank's 2% price stability target and financial conditions are accommodative. The BOJ has been lifting the policy rate only gradually toward a more neutral level estimated to be somewhat above 1%.

The BOJ also repeated its projection given in its quarterly Outlook Report issued after the April 27-28 meeting that 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 and remaining at around that level thereafter.

In its annual review on the pace of tapering the bank's purchases of Japanese government bonds that was first decided in July 2024, the board decided to maintain its June 2025 decision to reduce its JGB buying by about ¥200 billion a quarter so that the monthly purchase amount will fall to around ¥2.1 trillion in January-March 2027 from ¥2.7 trillion in April-June 2026 and ¥5.7 trillion in July 2024, just before the tapering began. The move is part of the process of unwinding its large-scale monetary easing that lasted for nearly a decade until March 2024.

As for fiscal 2027, the board decided to keep the scale of monthly JGB purchases at ¥2.0 trillion throughout the fiscal year ending in March 2028 after slightly trimming the amount to ¥2.0 trillion in April from ¥2.1 trillion the previous month.

The board's decision on tapering was 7 to 1. Naoki Tamura, a formerly with the SMBC financial group, dissented and called on the bank to continue reducing JGB purchases at the current pace of by ¥200 billion a quarter until the end of fiscal 2027. He argued that the BOJ should let market forces determine long-term interest rates.

The BOJ said it will no longer conduct an annual review on outright JGB purchases but that it may decide to change the pace of asset purchases at policy meetings. The bank repeated its basic stance that it will act swiftly to a rapid rise in long-term rates by raising JGB purchases and conducting fixed-rate JGB purchase operations among other tools.

In a June 3 speech, Ueda set the stage for a follow-up rate hike at the June meeting by warning that while remaining mindful of downside risks to the economy, BOJ policymakers need to be even more vigilant against the risk that inflation could rise significantly, as this could have adverse effects on the economy going forward. He said slightly higher interest rates as a result of the past rate increases since March 2024 were not dampening corporate demand for new funding either via borrowing from banks or issuing debt. He also noted that bankruptcies were on the rise but most of them had been caused by higher prices and labor shortages, and not by higher interest rates.

Market Consensus Before Announcement

The Bank of Japan’s board is widely expected to decide to raise the target for the overnight interest rate to 1% from 0.75% in a unanimous or majority vote at its June 15-16 meeting amid growing upside risks to inflation triggered by the Mideast conflict while Governor Kazuo Ueda, who has dropped a hint for an imminent rate hike in a recent speech, will miss the meeting for medical treatment. It would be the bank's first rate hike since December, when the board unanimously decided to raise the policy rate by 25 basis points to a 30-year high after standing pat for nearly a year while waiting for the uncertainty created by the protectionist U.S. trade policy to ease.

The board will also conduct its annual review on the pace of tapering the bank’s purchases of Japanese government bonds that was first decided in July 2024. It will set a guideline for its JGB purchase amounts for fiscal 2027 that ends in March 2028. The focus is on whether the bank will continue reducing JGB purchases by ¥200 billion a quarter, the same as now. In a May meeting with BOJ officials, many bond market participants urged the bank to maintain the current pace of reduction in order to improve market functions further while some argued that no further cut would be necessary. For the rest of fiscal 2026, the board is expected to maintain the June 2025 decision to reduce its JGB buying by about ¥200 billion a quarter so that the monthly purchase amount will fall to around ¥2.1 trillion in March 2027, down from ¥5.7 trillion in July 2024.

At its last meeting on April 27-28, the BOJ’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. This shows the voices calling for a follow-up rate hike among the board has become louder. Underlying CPI inflation is approaching the bank’s 2% target and firms’ behavior is shifting more toward raising wages and prices as elevated global energy and commodities prices triggered by the Iran war leading to markups for a wider range of goods and services.

Ueda, 74, is expected to be hospitalized for “about two weeks” from June 9, when a liver cyst infection was found during a routine physical checkup, according to the bank’s press office. The governor has been working remotely to conduct necessary official duties but will not vote at the next meeting. Instead, he will submit his opinions in writing. Ueda will attend the July 30-31 meeting in person. Deputy Governor Ryozo Himino, a former commissioner of the Financial Services Agency, the government watchdog, will chair the June meeting. Deputy Governor Shinichi Uchida, a career central banker, will hold a post-meeting new conference in place of Ueda. Uchida, 63, returned to work full time on May 27 after having completed medial treatment of leukemia which was first found in November.

Governor Ueda used his June 3 speech to convey a message that he is shifting his focus more toward upside risks to inflation from downside risks to economic growth amid uncertainty over how long the Iran war will continue disrupting global economic activity. While remaining mindful of downside risks to the economy, Ueda said, BOJ policymakers “need to be even more vigilant against the risk that inflation could rise significantly, as this could have adverse effects on the economy going forward.”

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.

Recommended for you

Upcoming Events