BOJ preview April: hawkish hold expected amid inflation, M.East uncertainty

The Bank of Japan is widely expected to leave interest rates unchanged at the conclusion of a meeting on April 28, although the central bank could strike a hawkish chord in the face of rising inflationary pressures and higher oil prices.

The BOJ is expected to keep its benchmark short-term interest rate at 0.75%, Investing.com data showed. The decision is likely to be the third consecutive hold after the central bank hiked rates by 25 bps in December.

While markets had initially expected another hike in April, a series of less hawkish messages from the BOJ tempered this notion. The central bank expressed heightened uncertainty over the economic impact of the Iran war, spurring bets that it will adopt a wait-and-see approach.

But the BOJ is also expected to remain largely hawkish in its outlook, and could hike inflation expectations in the face of energy and shipping shocks due to the Iran conflict.

“Prior to the ongoing Middle East conflict, we thought there was a strong possibility of rates going higher this month, but recent communications from senior officials have stressed the potential downside risks to growth,” ANZ analysts said in a note.

They said a 25 bps hike in June appeared more likely, and that the BOJ will retain its tightening bias amid sticky inflation and strong gains in Japanese wages.

Other analysts were less convinced of an April hold. ING analysts said a bigger-than-expected increase in Japanese consumer inflation in March may still elicit an April hike, especially if “the BOJ gives priority to preventing inflation expectations from accelerating.”

OCBC analysts said their base case remained for a 25 bps hike in April, although they acknowledged that current market pricing pointed more towards a hold.

Beyond the meeting, focus will be squarely on BOJ Governor Kazuo Ueda’s comments on future policy decisions. Ueda was seen somewhat tempering expectations for an immediate hike in recent weeks, which in turn drove a sharp reversal in market bets on an April hike.

How will USDJPY react?

Increasing expectations for an April hold had weighed on the Japanese yen in recent weeks, although the currency’s USD/JPY pair managed to hold below the 160 yen level.

Breaches of the level have drawn government intervention in currency markets in the past, with the currency’s relative resilience also denting expectations for an April hike.

Still, the BOJ faces a balancing act in keeping policy steady and preventing further weakness in the yen, with Governor Ueda likely to offer some hawkish signals to support the Japanese currency.

“Limited depreciation of the JPY since the Middle East conflict is another reason why the BoJ can refrain from raising interest rates at its upcoming meeting… JPY weakness would be adding to inflation pressures whilst the heightened risk of FX intervention would have raised the potential for a near-term rate hike,” ANZ analysts said.