Analysis:BOJ locks in June rate hike in a risky bet that nothing gets worse
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TOKYO, April 30 : The Bank of Japan effectively committed to a June rate hike this week as it talked up the risks of an inflation overshoot, a gambit that rests on a shaky assumption the Iran war won't significantly worsen the economic outlook.
Unusually blunt signals of a near-term rate hike highlight the BOJ's growing concern the energy shock could trigger second-round effects that may leave it behind the curve in addressing the risk of too-high inflation, analysts say.
"The message from the BOJ was that it was really focused on upside risks to inflation," said Tetsuya Inoue, executive economist at Sony Financial Group.
"The BOJ made clear that it could raise rates to combat inflationary risks, even if growth undershoots its baseline scenario," said Inoue, who predicts a hike in June.
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The BOJ kept rates steady at 0.75 per cent on Tuesday but dropped clear hints the June 15-16 meeting will be live, including through three dissenters on the nine-member board who proposed an immediate hike to 1.0 per cent.
Shedding its typically nuanced language, the BOJ said in its quarterly report that risks to inflation were bigger than those to growth, and that extra vigilance was needed to keep the risk of a sharp overshoot in inflation from materialising.
The central bank also tweaked its policy guidance to clarify that it could raise rates to address inflationary risks, as long as Japan averts a severe economic downturn.
The hawkish language reflected a sharp upgrade in the board's price forecasts that saw a key inflation gauge hitting 2.6 per cent in fiscal 2026 and 2027 - well above the BOJ's 2 per cent target.
Governor Kazuo Ueda said it was a matter of waiting for "a bit more data," in explaining why the BOJ stood pat this month, adding the bank would decide policy in June "to ensure it was not behind the curve" in addressing inflationary risks.
"It was immediately clear to me the BOJ was drawing up a narrative to justify a June rate hike," said former BOJ official Nobuyasu Atago. "For the first time, the BOJ seemed to be seriously worried about the risk of falling behind the curve."
For the hawks in the BOJ, pushing through a rate hike in June could be more convenient than waiting until July or beyond.
Junko Nakagawa, among the three dissenters in keeping rates steady in April, sees her five-year term end in June, making the policy meeting that month her last chance to vote for a hike. Her successor Ayano Sato was hand-picked by dovish premier Sanae Takaichi and seen by markets as less hawkish.
"The dissent from Nakagawa ... suggests the hawkish shift could run deeper than the headline split implies," said Kieran Williams, head of Asia FX at Intouch Capital Markets.
EASIER SAID THAN DONE
There is no guarantee, however, that conditions are met to push through a hike in June.
The BOJ's projections are based on the assumption that the Middle East conflict eases, crude oil prices decline and large-scale supply chain disruptions are averted.
But oil prices jumped 3 per cent on Tuesday, underscoring Ueda's persistent worries about supply constraints from the closed Strait of Hormuz. Stalled efforts to end the conflict could intensify supply disruptions that are already affecting domestic auto parts suppliers.
Japanese refineries are running at two-thirds their capacity and chemical plants are cutting output due to falling crude imports, which may hit broader factory activity and push Japan's economy into decline in the current quarter, some analysts say.
"With the Strait of Hormuz remaining closed and concerns over oil supply persisting, downside risks cannot be ignored, making a June hike difficult in practice," said Takeshi Minami, chief economist at Norinchukin Research Institute in Tokyo.
Political pressure may also get in the way. Economy Minister Minoru Kiuchi has repeatedly called on the BOJ to align its rate decisions to the government's focus on accelerating growth.
Known as an advocate of loose monetary policy, he attended the BOJ's policy meeting on Tuesday in a sign the government was keeping a watchful eye on any signs of an early rate hike.
Takaichi's administration will lay out in June its flagship growth strategy focusing on boosting investment. Growing signs of economic strain could also heighten calls for a supplementary budget backed by new debt.
If supply disruptions spread, the likelihood of economic deterioration would increase and prod the administration to more strongly oppose an early rate hike, said Takeshi Yamaguchi, chief Japan economist at Morgan Stanley MUFG Securities.
Aside from setting short-term rates, the BOJ will also review in June its bond taper plan and craft a new one for the fiscal year beginning in April 2027.
While BOJ officials say that would not affect discussions on rates, a mix of a rate hike and balance sheet reduction - if badly communicated - could upend markets.
"Ueda sounded very hawkish this time, suggesting he sees a June rate hike as a given," said Mari Iwashita, executive rates strategist at Nomura Securities. "But whether it could actually do so is a completely different question."
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