A Mildly Hawkish BOJ May Do Little to Halt Yen Slide as Fall Rate-Hike Bets Rise
After raising its policy rate by 25 basis points in June, the Bank of Japan is widely expected to keep its benchmark rate at 1% at its July meeting. A persistently weak yen, imported inflation pressures and continued wage gains are providing grounds for further rate hikes. The BOJ's Policy Board is meeting in Tokyo on July 30–31. Afterward, it is scheduled to announce its rate decision, release its Outlook for Economic Activity and Prices and hold a news conference with the governor. The central bank has previously warned that the conflict in the Middle East could pose downside risks to the economy, potentially offsetting the conflict's inflationary impact. That warning has helped strengthen expectations that the BOJ will leave rates unchanged in July. Japan's consumer price index has recently picked up, but core inflation remains below the BOJ's 2% annual target. The source attributes this mainly to the government's continuing subsidy programs, which have substantially eased the impact of high energy costs on consumers. Producer prices, however, have risen sharply this year, and the market expects those increases to be passed on to consumers, supporting the medium- to long-term inflation outlook. The BOJ has previously signaled that it is prepared to raise rates further because inflation remains elevated, particularly with the conflict in the Middle East driving up energy prices. Analysts at Australia and New Zealand Banking Group said in a report, “As the lagged effects of yen weakness and higher oil prices gradually emerge, we expect the various inflation indicators to continue rising in the coming months.” ANZ expects the BOJ could raise rates by another 25 basis points as early as October. It also said the central bank could move sooner if the yen continues to weaken. Foreign-exchange intervention led by Japan's Ministry of Finance in April and May was less effective than expected this year, while continued yen weakness has pushed up import costs for energy, food and other goods, squeezing household finances and increasing pressure on the BOJ to keep raising its policy rate. Industry observers say several Policy Board members believe Japan's neutral policy rate is closer to 2.00%, making the key question how quickly the country reaches that level. Media reports say some members favor another rate hike as early as September or October rather than waiting until December under a more gradual approach. The bond market is also showing support for a faster pace of tightening. The steepness of Japan's 2- to 10-year government-bond yield curve has surpassed its 2010 high, with many market participants attributing the move to the BOJ's actions lagging behind inflation developments. Wage increases are providing another basis for further rate hikes. An advisory committee to Japan's Ministry of Health, Labour and Welfare recommended this Tuesday that the national average minimum hourly wage be raised 4.9% this fiscal year to 1,176 yen, or about $7.18. Although the increase is below last year's record 6.3% rise, the 55-yen increase in the hourly wage would be the second-largest on record. That increase would support the BOJ's policy goal of creating a virtuous cycle of rising wages, stronger domestic demand and steadily rising prices, giving the central bank a basis for raising rates further. A mildly hawkish stance may not support the yen The dollar-yen exchange rate surged at one point this year to a 40-year high and remained near that level ahead of the BOJ meeting. As of publication, one U.S. dollar bought 163.55 yen. The wide interest-rate gap between the United States and Japan, combined with sharply higher import costs for oil, natural gas and other commodities, has weighed on the yen. Although Japanese officials have repeatedly warned that they could intervene in the foreign-exchange market to support the yen, the currency has not received a noticeable boost. Hawkish signals from the BOJ have provided only brief support for the exchange rate. ING analysts said in a report, “Some market participants believe the central bank could accelerate the pace of tightening and raise rates in October, but we believe a mildly hawkish policy shift would be unlikely to provide a significant boost to the yen or alter the overall outlook for dollar-yen.” Industry observers also said that concerns about a valuation bubble in the AI sector have weighed on technology and chip stocks, sending the Nikkei 225 down more than 4% this week. Any hawkish signal from the BOJ could further disrupt Japan's domestic stock market.
The BOJ's Policy Board is meeting in Tokyo on July 30–31. Afterward, it is scheduled to announce its rate decision, release its Outlook for Economic Activity and Prices and hold a news conference with the governor. The central bank has previously warned that the conflict in the Middle East could pose downside risks to the economy, potentially offsetting the conflict's inflationary impact. That warning has helped strengthen expectations that the BOJ will leave rates unchanged in July.
Japan's consumer price index has recently picked up, but core inflation remains below the BOJ's 2% annual target. The source attributes this mainly to the government's continuing subsidy programs, which have substantially eased the impact of high energy costs on consumers.
Producer prices, however, have risen sharply this year, and the market expects those increases to be passed on to consumers, supporting the medium- to long-term inflation outlook.
The BOJ has previously signaled that it is prepared to raise rates further because inflation remains elevated, particularly with the conflict in the Middle East driving up energy prices.
Analysts at Australia and New Zealand Banking Group said in a report, “As the lagged effects of yen weakness and higher oil prices gradually emerge, we expect the various inflation indicators to continue rising in the coming months.”
ANZ expects the BOJ could raise rates by another 25 basis points as early as October. It also said the central bank could move sooner if the yen continues to weaken.
Foreign-exchange intervention led by Japan's Ministry of Finance in April and May was less effective than expected this year, while continued yen weakness has pushed up import costs for energy, food and other goods, squeezing household finances and increasing pressure on the BOJ to keep raising its policy rate.
Industry observers say several Policy Board members believe Japan's neutral policy rate is closer to 2.00%, making the key question how quickly the country reaches that level.
Media reports say some members favor another rate hike as early as September or October rather than waiting until December under a more gradual approach.
The bond market is also showing support for a faster pace of tightening. The steepness of Japan's 2- to 10-year government-bond yield curve has surpassed its 2010 high, with many market participants attributing the move to the BOJ's actions lagging behind inflation developments.
Wage increases are providing another basis for further rate hikes. An advisory committee to Japan's Ministry of Health, Labour and Welfare recommended this Tuesday that the national average minimum hourly wage be raised 4.9% this fiscal year to 1,176 yen, or about $7.18. Although the increase is below last year's record 6.3% rise, the 55-yen increase in the hourly wage would be the second-largest on record.
That increase would support the BOJ's policy goal of creating a virtuous cycle of rising wages, stronger domestic demand and steadily rising prices, giving the central bank a basis for raising rates further.
A mildly hawkish stance may not support the yen
The dollar-yen exchange rate surged at one point this year to a 40-year high and remained near that level ahead of the BOJ meeting. As of publication, one U.S. dollar bought 163.55 yen.
The wide interest-rate gap between the United States and Japan, combined with sharply higher import costs for oil, natural gas and other commodities, has weighed on the yen.
Although Japanese officials have repeatedly warned that they could intervene in the foreign-exchange market to support the yen, the currency has not received a noticeable boost. Hawkish signals from the BOJ have provided only brief support for the exchange rate.
ING analysts said in a report, “Some market participants believe the central bank could accelerate the pace of tightening and raise rates in October, but we believe a mildly hawkish policy shift would be unlikely to provide a significant boost to the yen or alter the overall outlook for dollar-yen.”
Industry observers also said that concerns about a valuation bubble in the AI sector have weighed on technology and chip stocks, sending the Nikkei 225 down more than 4% this week. Any hawkish signal from the BOJ could further disrupt Japan's domestic stock market.