BOJ Seen Holding Rates in Messaging Risk for Ueda as Yen Teeters

jv3yburooe[c3ow20c5gffj2_media_dl_1.png Bloomberg

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(Bloomberg) — The Bank of Japan is widely expected to keep interest rates unchanged on Tuesday, setting up a communication challenge for Governor Kazuo Ueda as the foundering yen hovers near levels that have prompted past interventions.

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Just weeks ago, markets and economists were betting Ueda and his board would press ahead with their normalization efforts and deliver another hike at the end of their two-day meeting on Tuesday. Those bets dissipated as US President Donald Trump’s war on Iran sent oil prices surging, with markets now pricing just a 7% chance of a move, and many economists switching to a June increase.

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Assuming there’s no shock — which can’t be ruled out as people familiar with deliberations have said the final decision will be made at the last possible moment — focus will rapidly shift to Ueda’s policy signals. The statement usually lands around noon in Tokyo, with Ueda’s press conference typically starting at 3:30 p.m.

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“The key thing is how strongly the BOJ will communicate their determination to continue rate hikes to curb the yen’s depreciation,” said Shigeto Nagai, former head of the BOJ’s international department. 

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The currency was hovering around 159.50 per dollar early Monday in Tokyo, not far from the level where authorities last intervened to support the yen in 2024. At a Bloomberg New Voices event in Tokyo on Thursday, Finance Minister Satsuki Katayama warned that officials are in close contact around the clock with their US counterparts as Tokyo remains on high alert over speculative moves that are weighing on the yen.

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What Bloomberg Economics Says…

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“Pressure from Sanae Takaichi’s pro-stimulus administration to stay on hold for longer likely put a hike on ice… Keeping rates deep in the stimulus zone as the inflationary shock from the Middle East sweeps over Japan would be a bad look for its independence. We expect a rate hike in June.”

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— Taro Kimura, economist

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Last week, people familiar with planning told Bloomberg that the BOJ was leaning toward keeping its policy rate unchanged at 0.75% given uncertainties stemming from the war in Iran. Officials are still committed to raising borrowing costs sooner or later, they said.

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But differing viewpoints suggest the possibility of a widening divergence among the board’s nine members, who voted 8-1 to hold policy settings steady at the last meeting in March.

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Volatility tied to the Iran conflict has heightened uncertainty around energy costs and supply-chain durability, making it difficult for policymakers to pull the trigger on their next hike.

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“There are limits to how hawkish the BOJ’s communication can be,” said Naka Matsuzawa, chief strategist at Nomura Securities. “It is unclear whether Japanese authorities will be able to contain yen depreciation and bond curve steepening in the run-up to the next meeting in June.”

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The yen’s three-month option-implied volatility fell to a two-year low last week as speculation of potential intervention capped downside risks.