“It is quite conceivable that the bank may increase the policy interest rate starting from the next monetary policy meeting, even if the situation in the Middle East remains uncertain,” one board member remarked, as indicated in the summary of opinions released on Tuesday from the April meeting.
On April 28, Governor Kazuo Ueda’s board voted 6-3 to maintain current policy settings, a notably split decision that suggests growing momentum for a rate hike when policy is reviewed on June 16. Market traders are anticipating a 77% likelihood of an increase at that time, with the summary backing that outlook.
Though the summary does not reveal individual opinions, several members expressed heightened vigilance regarding inflation risks and the necessity of raising rates, even if tensions between the US and Iran continue. The uncertainties related to developments in the Middle East were a significant factor in the decision to keep rates steady last month.
“If tensions surrounding the Middle East extend for too long, it will be necessary to elevate the policy interest rate to the neutral level sooner to avert upward deviations in underlying inflation,” one member stated.
The release of the summary coincided with US Treasury Secretary Scott Bessent’s scheduled meetings with multiple officials in Tokyo, including Prime Minister Sanae Takaichi, who has previously opposed increasing interest rates. Bessent has advocated for the government to allow the BOJ the latitude to raise rates in order to prevent lagging behind in combating inflation.
Finance Minister Satsuki Katayama reaffirmed the existing policy that the specifics of monetary policy should be entrusted to the BOJ following her earlier discussions with Bessent.
The BOJ stands out among G7 central banks, grappling with geopolitical pressures from the Middle East while also striving to raise rates to a neutral level from the current 0.75%, the lowest among major economies.
“Japan’s real policy interest rate is considerably the lowest worldwide, and it is essential that the bank continues to adjust the negative real interest rate in anticipation of the secondary effects of rising prices,” one member noted.
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At the gathering that concluded on April 28, the BOJ significantly raised its inflation outlook, more than many analysts had predicted. During his post-meeting press conference, Ueda conveyed some hawkish signals, although he couldn’t prevent the yen from depreciating against the dollar.
Japan’s Ministry of Finance has likely intervened in the currency market recently to support the yen after it declined beyond the critical threshold of 160 per dollar. The ongoing weakness of the yen creates challenges for the BOJ to adopt any dovish stances.
A cabinet office official representing the government during the BOJ meeting emphasized the importance of proper monetary policy management.
“To achieve both robust economic growth and stable inflation, it is crucial that monetary policy is implemented appropriately,” the official stated.
