Amid a multitude of major central bank meetings next week, Tuesday’s BOJ rate decision has the biggest chance of surprising markets and generating Forex volatility. The consensus is for the BOJ to hold rates unchanged for the third time in a row. However, there is a high chance that Governor Kazuo Ueda could drop solid hints of a rate hike of a hike in June.
Typically, central banks like to telegraph important policy changes in advance to prepare markets and minimise the financial fallout. Which means the language of the statement or the focus of the post-rate press conference typically includes clear hints. Tomorrow’s meeting is the last before the June meeting, where there is a 60% chance of a rate hike, according to financial markets.
Reacting to the Odds
That means if the BOJ hikes in June, we should expect some solid hints to be dropped at Tuesday’s meeting. If not, the market could shift its expectations to July. With 60-40 odds, that means that no matter what happens, the market will have to adjust, either to the hawkish or to the dovish side.
There is a slight possibility that Ueda tries to split the difference, communicating a very hawkish tone while keeping rates unchanged. But with USDJPY so close to the 160 level, it’s highly likely the market will not fall for it again. Japanese officials have been increasingly urgent in their rhetoric, trying to shore up the yen as carry traders try to weaken it against other currencies. This job is getting increasingly harder as the ECB and BOE are likely to be forced to raise rates in the near term.
Delivering Shock to Get the Market in Order
The more effective way to support the yen would be to raise rates and shock markets in doing so. Though it should be noted that the BOJ did so back in mid-2024, generating significant economic fallout and prompting it to reassure financial institutions that it would be more cautious in the future. Shocking the market isn’t Ueda’s style.
What has hurt the BOJ’s ability to threaten the yen in the direction it wants is the lack of inflation. The recent surge in energy prices is expected to raise consumer prices, but that is still seen as temporary. On top of that, the government has been pulling out all the stops to soften the blow by increasing deficit spending, a move that also weakens the yen.
What the Market Will Be Looking For
In the months leading up to the war in the Middle East, Ueda has tried to suggest both that inflation will come down to the target and that the BOJ would keep gradually raising rates. It was a tough sell, and the inflation boost from the war could help provide a more convincing message on inflation. Even if financial authorities achieve their objective of shoring up the yen, it will have the added effect of reducing inflation. That undermines the argument for higher rates, making carry trade (and a weaker yen) more appealing.
Traders will be looking for more definitive rhetoric about the need for a rate hike soon. That could take the form of Ueda expressing concern about the potential inflationary impact of higher energy prices. Or he could be more vague about the trajectory of inflation, instead of sounding confident that it will return to target soon. Both of those options would likely be interpreted by the market as hints that the BOJ will hike in June.
