Bank of Japan keeps low rates, hints at rate hikes if yen falls

TOKYO, Japan: The Bank of Japan (BOJ) held interest rates steady around zero over the weekend, expressing confidence in reaching its two percent inflation target while hinting at potential rate hikes later this year.

BOJ Governor Kazuo Ueda suggested that interest rates could rise if new data align with the bank’s inflation projections or if inflation surpasses expectations. However, he refrained from providing specific details on the timing of future rate hikes.

The lack of clear guidance on the path of rate hikes led to a broad-based decline in the yen, with concerns rising over potential currency intervention.

"The currency takeaway is certainly disappointment from the lack of guidance from the bank," said Rodrigo Catril, senior FX strategist at National Australia Bank in Sydney.

"To me the currency market is telling us it believes that the BOJ policy is too loose and hence why the currency is so weak. The Bank has the ability to do something about that by changing its policy, and if it’s not going to change the policy, then we shouldn’t expect the yen to strengthen."

Despite expectations for possible adjustments to bond purchases to curb yen declines, the BOJ maintained its short-term interest rate target and bond-buying guidance from March. Governor Ueda emphasized the temporary nature of yen movements but acknowledged their potential impact on inflation and wage dynamics.

"That is not to say we need to wait until the outcome of next year’s wage talks become clear," Ueda said at a press briefing after the meeting. "If we can predict such an impact, we could change policy."

The BOJ’s quarterly outlook report highlighted confidence in achieving sustained inflation, projecting gradual increases in core consumer inflation.

"The forecast, very clearly in the upper two percent range, opens the way to future rate hikes given, of course, that the ‘virtuous circle’ stays intact," said Naomi Fink, global strategist at Nikko Asset Management.

"The key to the ‘virtuous circle’ remains positive real wages, and higher-than-expected inflation would challenge this virtuous circle. Only in the event inflation is eating into real wages, this is an argument for greater central bank hawkishness," she said.

While the BOJ indicated openness to future rate hikes, it reiterated its commitment to maintaining current bond-buying levels. Although the BOJ removed explicit quantitative guidance on bond purchases, it emphasized adherence to the March guidance, signaling ongoing support for bond markets.

Ueda clarified that any reduction in bond purchases would not serve as an active monetary policy tool, highlighting the BOJ’s cautious approach to policy adjustments. "We’re still scrutinising how markets digest our March policy shift. If we were to reduce our bond buying in the future, we don’t want to use it actively as a monetary policy means," Ueda said.

Under the current guidance, the BOJ’s markets department can conduct bond-buying operations to move monthly purchases from 5 to 7 trillion yen.