BoJ’s potential hawkish signaling overshadows upcoming rate decision

The Bank of Japan (BoJ) is expected to maintain its rates on Friday, but its potentially hawkish messaging on its future policy roadmap due to inflationary pressures and the yen’s depreciation has taken precedence over its rate decision on investors’ agendas.

Japan is one of the countries most affected by inflationary pressures stemming from Middle East tensions and sharp increases in oil prices.

The US dollar-Japanese yen exchange rate reached a 40-year high of 168.93, fueling expectations that the country’s economic authorities may intervene in the currency market.

Japan’s annual inflation stood in line with estimates at 1.7% in June, but it accelerated from the previous month, while high oil prices drove the country’s core inflation to 1.6%, also marking a faster pace than in May.

Japanese Prime Minister Sanae Takaichi said the administration is moving away from years of austerity policies and fiscal tightening.

Potential disagreements and divisions between political leaders and BoJ officials have come to the fore amid rising inflationary pressures and the sharp depreciation of the Japanese yen.

Marcel Thieliant, head of Asia-Pacific at Capital Economics, told Anadolu that the renewed rise in oil prices means the BoJ will face downside risks to economic activity and that the bank is preparing for a rate hike in October due to the Japanese yen’s depreciation.

“The bank is set to hike again in October with rates reaching above-consensus 2% by end-2027,” he said.

“The bank will surely stick to its view that risks to inflation are tilted to the upside, (while) the bank’s concerns about upside inflation risks won’t have dissipated,” he added.

Ahmad Assiri, market strategist at Australia-based Pepperstone, told Anadolu that the BoJ will not change its policy rate from the 1% level this week following its hike at its last meeting, while markets will focus on updated forecasts and remarks by BoJ Governor Kazuo Ueda to shed some light on the bank’s future policy roadmap.

“The BOJ is expected to maintain a slightly hawkish tone, supported by a degree of price pressure, good wage growth and the continued impact of a weaker yen on prices,” he said. “The bank may also slightly upgrade its economic outlook, signaling confidence that Japan's growth remains on track despite global uncertainties relating to higher energy prices.”

He noted that growing confidence that the BoJ will hike rates once more this year could support and push up Japanese government bond yields, but more cautious statements from bank officials could add further pressure on the yen, especially if the Fed adopts a hawkish stance.

Sadi Kaymaz, an Asian markets analyst, told Anadolu that the BoJ raised its policy rate by 25 basis points to 1% at its last meeting, saying that the bank will now assess the impact of that decision.

Kaymaz noted that the BoJ will maintain rates with a 96% probability implied by futures markets but “keeping the rate steady doesn’t mean tightening is over.”

“If the economy and inflation develop in line with estimates, rate hikes will continue,” he said, adding that dissenting voices at the BoJ’s upcoming meetings will be monitored.

“There are some members at the bank who wish to see the interest rate reach a more neutral level of 2% more quickly, so for them, the BoJ just passed the halfway point already,” he noted. “This meeting will provide further insight into the next rate hike.”

Kaymaz said that the BoJ could raise its growth forecast from 0.5% to around 0.8%, while a weak Japanese yen against the US dollar could bring forward the rate hike schedule.

“The BoJ’s official target is inflation, not the yen, but the bank views this exchange rate weakness through prices, so if inflationary pass-through accelerates via food and energy imports, the BoJ’s room for maneuver will narrow,” he said.

“The Takaichi government wants to support growth through high public spending, so high interest rates would render this program even more expensive, and they could also cool the economy prematurely, which is why the government prefers gradual rate hikes,” he added.