BOJ's Split Vote on Rates Marks Most Hawkish Divide of Ueda Era

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BOJ's Split Vote on Rates Marks Most Hawkish Divide of Ueda Era.

general :: 6hrs ago :: source - bloomberg

By Toru Fujioka

(Bloomberg) -- The Bank of Japan left its key interest rate unchanged in a split vote that boosted the chance of a June hike. But the weak yen saw only a brief respite as Governor Kazuo Ueda cast doubt on the economy’s outlook.

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The BOJ held its policy rate steady at 0.75% at the end of its two-day policy meeting Tuesday, according to a statement. The 6-3 vote represents the biggest divide under Ueda’s governorship, suggesting swelling pressure to normalize policy.

The yen strengthened soon after the decision, briefly breaking through the 159 level against the dollar. But it pared gains during Ueda’s press conference after he said there’s now less likelihood the BOJ will meet its outlook for the economy and prices. That keeps the door open to a longer hold as the war in the Middle East clouds prospects for growth.

“If I were to sum up the main reason for stand-pat in one sentence, it’s that the certainty of meeting our baseline outlook has declined quite significantly this time,” Ueda said.

Those comments came after the bank said in an earlier statement that price trends are likely to be in line with its stable inflation target of 2% in the second half of fiscal 2026 to fiscal 2027 — in line with past guidance. It also halved its forecast for economic growth this fiscal year to 0.5%.

In an hour-long press conference, the governor continued to give the even-handed comments that have left investors confused about his main message in the past. Having indicated there was less confidence in the outlook than before, he also kept the door open to a June rate move even if the economy starts to slow.

“I believe there is a possibility that we could raise interest rates” if price risks worsen and a major downturn is avoided, Ueda said.

“We saw three dissenting votes, and as chair I take that seriously,” Ueda told reporters. “But when you look at why that happened, it reflects the situation of a negative supply shock, with the economy weakening while prices rise. In that environment, deciding the appropriate course of monetary policy becomes extremely challenging.”

Late Tuesday in Tokyo, the yen weakened to as much as 159.69, its softest since Friday and still uncomfortably close to the level where the government intervened to support it two years ago. The late weakening in the yen also coincided with gains in the dollar and oil prices.

Mari Iwashita, executive rates strategist at Nomura Securities, said she was “a little puzzled by the yen’s reaction” after the press conference.

“Ueda was sending clear hawkish signals in line with the BOJ’s statement today,” she said. “I’ve never seen him using the words ‘rate hike’ so many times.”

The BOJ is the first among major central banks this week to stand pat, with the Federal Reserve, Bank of England and European Central Bank all forecast to follow suit as they assess fallout from the war in the Middle East. The BOJ’s rates are the lowest among major economies, creating a yield gap that’s contributing to the yen’s weakness.

Traders see a 66% chance of a rate hike when the BOJ next sets policy on June 16, according to pricing in the overnight swaps market. That’s also tipped by BOJ watchers, with 57% forecasting a move then, according to a survey by Bloomberg News in the lead up to the decision. Some 80% of 51 economists surveyed forecast the stand-pat decision.

Ueda’s board raised its forecast for core inflation to 2.8% for this fiscal year, more than expected, in a quarterly outlook report.

The BOJ underscored the need to watch developments in the Middle East and oil prices after US President Donald Trump’s war in Iran derailed what markets had been betting would be a hike at Tuesday’s meeting as recently as early April. Since then, many economists switched to forecasting a June increase.

“It is necessary to pay particular attention to the impact of the future course of the situation in the Middle East on financial and foreign exchange markets and on Japan’s economic activity and prices,” the bank said in a statement.

In April 2024, after a decision to hold rates, the governor’s comments on the yen were taken as dovish, sparking a rout in the currency that ultimately prompted intervention days later.

Authorities may consider a similar course of action if investors remain unconvinced about the BOJ’s intentions and the yen crosses the 160 line again. Tokyo could use the low liquidity of coming national holidays as a good opportunity to move the currency should the yen remain vulnerable after the Fed and other major central bank decisions this week.

The BOJ tweaked language in its statement around its intention to raise the benchmark rate if its economic outlook is realized. The central bank said it would keep hiking rates in response to “developments” in the economy, whereas former language cited that bias in the case of economic “improvement” — a change that may leave scope for a move even as growth slows.

The bank also said it would monitor financial conditions.

Hawkish board members Hajime Takata and Naoki Tamura were joined by consensus-leaning member Junko Nakagawa in voting to increase rates at this meeting.

What Bloomberg Economics Says...

“We continue to expect the BOJ to lift its target rate to 1% in June. That said, it’s not clear-cut with the central bank’s independence under pressure from Prime Minister Sanae Takaichi’s pro-stimulus administration. It was that pressure, in our view, that prompted the BOJ to soften its hawkish stance seen in March.”

— Taro Kimura, economist

Click here: Rate Hold Faces Heat From Three Dissenters, Oil Shock

Still, Prime Minister Sanae Takaichi’s preference for ongoing monetary stimulus may complicate the BOJ’s efforts to continue policy normalization. Toichiro Asada, who is known as a reflationary academic, sat at the rate-setting meeting for the first time since he was selected by Takaichi to sit on the board. Ayano Sato, also known for her reflationary stance, will join the board in June.

Ueda said the bank keeps close communications with Takaichi’s government and that Tuesday’s policy decision was made without influence from the government.

“Everything hinges on the situation in the Middle East,” said Harumi Taguchi, principal economist at S&P Global Market Intelligence.

--With assistance from Mia Glass, Molly Smith, Yoshiaki Nohara and Brian Fowler.

(Updates with comment from Ueda press conference)