By Leika Kihara
WASHINGTON, April 17 (Reuters) – Bank of Japan Governor Kazuo Ueda refrained from pre-committing to an April rate increase as the Iran war muddled the outlook, but left a few hawkish signs after this week’s IMF meetings, suggesting a hike remains on the cards in June, if not this month.
While markets focused on a lack of clear hints of an April rate hike, Ueda also did not play down the chance of one and stressed the need to scrutinise Middle East developments and their impact on Japan’s economy.
Having left both options on the table, BOJ policymakers may waver until the last minute on deciding whether to hike the policy rate at their April 27-28 meeting, depending partly on how U.S.-Iran talks to end the war unfold, say three sources familiar with BOJ thinking.
“With so much uncertainty, it’s too early to decide now what to do at a policy meeting more than a week away,” said one of the sources, a view echoed by another source.
During his visit to Washington to attend the IMF, G7 and G20 meetings, Ueda faced a barrage of calls to follow other central banks taking a “wait-and-see” mode as a rapid turn of events surrounding the conflict whipsaws markets.
The most explicit pressure came from Finance Minister Satsuki Katayama, who was also in Washington for the meetings and known as a close aide to dovish premier Sanae Takaichi.
“Most European and U.S. central banks seem to be taking a wait-and-see mode including (Federal Reserve Chair Jerome) Powell,” she told reporters on Wednesday in comments some analysts took as a swipe at the BOJ’s rate-hike attempt.
The International Monetary Fund also signalled that it saw little need for the BOJ to rush into hiking, saying the central bank can see through inflationary pressures from the war as any second-round effects on broader prices will be limited.
All eyes were on how Ueda would respond in a news briefing on Thursday, which was the last pre-set event where the BOJ could drop policy signals before the April rate review.
“Our decision will be based on the likelihood of our projections materialising, as well as the risks,” Ueda said in contrast to past episodes where he gave advance hints of a hike by saying the BOJ would consider or debate a rate increase.
The lack of strong cue led markets to sharply reduce bets of a policy shift this month.
“The fact Ueda didn’t use the word ‘rate hike’ this time is a sign to markets that rates will be on hold this month,” said Mari Iwashita, executive rates strategist at Nomura Securities known as a veteran BOJ watcher.
STRONG CASE FOR HIKE
Largely overlooked, however, were some hawkish signals the governor dropped that underscored how the BOJ was keeping options open for a near-term rate hike – including in April.
For one, Ueda said any hit to growth from the Middle East war must be weighed against solid corporate profits and the boost from government stimulus.
When asked whether the BOJ would follow its counterparts in taking a wait-and-see approach, Ueda said Japan’s situation was different, with extremely low real interest rates keeping financial conditions accommodative.
“The BOJ probably sees no need to ditch its policy of continuing with moderate rate hikes,” said Naomi Muguruma, chief bond strategist at Mitsubishi UFJ Morgan Stanley Securities.
“If not in April, the BOJ will probably hike in June or July at the latest,” she said.
Indeed, markets see roughly an 80% chance the BOJ will hike by June, even though bets for an April hike slid to around 10% from a peak of 70% earlier this month.
The BOJ has a strong case to push ahead with rate hikes.
Unlike its U.S. and European peers, its policy rate, at 0.75%, remains below levels deemed neutral to the economy. With inflation running around 2%, the BOJ risks overheating the economy by keeping real borrowing costs deeply negative.
Delaying rate hikes could also cause unwelcome yen falls that push up import costs and broader inflation. The Japanese currency is on the cusp of sliding below the 160-per-dollar mark that triggered past yen-buying interventions.
While a minority, some analysts see scope for an April hike.
“The governor probably hasn’t made up his mind on what to do at April’s meeting and will scrutinise until the last minute the fate of U.S.-Iran negotiations and the market’s response,” said Ryutaro Kono, chief Japan economist at BNP Paribas.
“If ceasefire talks result in a significant de-escalation of risks, there’s a chance the BOJ will push through a rate hike in April.”
(Reporting by Leika Kihara; Additional reporting by Makiko Yamazaki, Takaya Yamaguchi and Takahiko Wada; Editing by Andrea Ricci)
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