BOJ and Possible Rate Change. Ideas later.

 

BOJ leaves policy rate unchanged at 0.75%, sharply raises inflation outlook

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TOKYO (Kyodo) -- The Bank of Japan on Tuesday kept its key interest rate at around 0.75 percent due to uncertainty over the Middle East conflict but sharply raised its inflation outlook for the current fiscal year, reinforcing expectations of a rate hike in the near future.

In its latest quarterly outlook report, released after the central bank stood pat for the third consecutive meeting in a widely expected move, the central bank said that core consumer prices, excluding volatile fresh food prices, are expected to rise by 2.8 percent in fiscal 2026, up from the 1.9 percent forecast in January.

It expects the Japanese economy to grow 0.5 percent in the current fiscal year that started in April, at a much slower pace than the initially projected 1.0 percent, as the rise in crude oil prices is expected to push down corporate profits and households' real income.

Three out of nine BOJ policymakers -- Hajime Takata and Naoki Tamura, both hawkish members, and Junko Nakagawa -- voted against the decision to keep the rate steady and called for a hike to 1.0 percent, noting that risks to prices were skewed to the upside.

The BOJ said elevated crude oil prices could fuel inflation in the country through driving up import costs of energy and goods but could also dampen growth through large-scale disruptions in supply chains.

Regarding the double risk, the bank said they could both heighten but that it will pay due attention to keep inflation from "significantly deviating upward" and exerting an adverse impact on the economy.

It noted that prices have already become elevated due to firms' behavior shifting more toward raising wages and prices.

Japan imports more than 90 percent of its crude oil from the Middle East, making it highly vulnerable to the effective closure of the Strait of Hormuz, which has disrupted the transportation of oil and petroleum products from suppliers in the Persian Gulf since the U.S.-Israeli attacks on Iran began on Feb. 28.

In the report, the BOJ kept its expectation that its 2 percent inflation goal will be attained between the second half of fiscal 2026 and fiscal 2027 that ends in March 2028.

For fiscal 2027, the BOJ said Japan's real gross domestic product is projected to grow 0.7 percent, down from the 0.8 percent projected in January, and 0.8 percent the subsequent year.

Core consumer price index is projected to rise 2.3 percent in fiscal 2027, up from 2.0 percent, and then decelerate to 2.0 percent in fiscal 2028. The bank released its forecasts for fiscal 2028 for the first time.

Despite the latest decision, BOJ watchers expect the Policy Board to raise the key interest rate -- currently at a 30-year high -- in the coming months.

The BOJ vowed to continue to raise the policy rate and consider the timing and pace of monetary adjustments while "closely monitoring" the impact of the future course of the Middle East situation on Japan's economy and prices.

The yen strengthened against the U.S. dollar shortly after the BOJ's announcement, briefly breaching the 159 line.

BOJ Governor Kazuo Ueda is scheduled to hold a press conference later in the day.

The Iran war has complicated the BOJ's efforts to further normalize its monetary policy following a decade of unorthodox easing that ended in March 2024.

The BOJ has maintained that its goal of achieving stable 2 percent inflation is within reach, but inflation caused by cost-push factors poses a challenge to the central bank, which aims to achieve price increases supported by wage increases and domestic demand.

Headline inflation numbers have stayed around the 2 percent threshold, but raising its policy rate to counter cost-push inflation would cool economic growth.

Still, maintaining market expectations for another rate hike is important to prevent the yen from falling further against the U.S. dollar, which could accelerate inflation in resource-scarce Japan via higher import prices.

Among overseas peers, the U.S. Federal Reserve is expected to keep its monetary policy steady at its policy-setting meeting this week amid the high uncertainty stemming from the Middle East conflict.

Article source:   https://mainichi.jp/english/articles/20260421/p2g/00m/0bu/002000c