BOJ likely to skip rate hike in July, former official says

The Bank of Japan is unlikely to raise interest rates in July and will instead cut its bond buying a little more than expected to avoid any fuelling of yen weakness, according to a former executive director at the central bank.

“I don’t think there’s a chance of a rate hike in July,” Mr Hideo Hayakawa said in an interview on July 17. “It’s hard to confirm from recent data that the economy is definitely progressing in line with BOJ expectations.”

Japan’s consumer spending has fallen every quarter for a year to March on the back of a prolonged decline in real wages, a sign of unexpected weakness for the BOJ, said Mr Hayakawa, who was also chief economist at the bank. 

The central bank needs more time to assess incoming data this summer, when the economy is expected to pick up, he said. 

Mr Hayakawa’s remarks support the majority view of BOJ watchers that the bank will not raise rates at the end of a two-day meeting on July 31. Those economists who still see a hike coming in July are citing weakness in the yen as a key factor. 

The government made clear its deep concern over the currency last week with suspected back-to-back interventions in the foreign exchange market to prop up the yen. 

Instead of raising rates, the central bank is likely to announce a bigger reduction of bond buying than previously expected to provide a hawkish signal that tempers pressure on the yen, said Mr Hayakawa. 

Cutting the purchases may help put upward pressure on yields and narrow the large gap between long-term rates, an important driver of moves in the FX market.

Mr Hayakawa accurately predicted a tweak to the central bank’s control of yields in July 2023. He left the central bank in 2013.

“The bank shouldn’t be ultra-cautious about cutting back its bond buying,” Mr Hayakawa said. “The markets will price in a weaker yen if the BOJ sticks to an extremely cautious line even when it has kept rates unchanged.”

The BOJ is under pressure to avoid sparking further yen weakness, especially with the Finance Ministry likely to have spent around 15 trillion yen (S$129 billion) on interventions in recent weeks. Households and smaller businesses are becoming increasingly wary of the yen’s impact via higher import costs that are keeping inflation elevated.

Following a post-meeting press conference in April, bank governor Kazuo Ueda’s remarks showing little immediate concern over the yen powered sharp falls in the yen that eventually led to the first round of currency intervention in 2024. 

Since a meeting with Prime Minister Fumio Kishida in early May, Mr Ueda has adjusted his tone and sent warning signals on the currency.

“The Finance Ministry must be thinking, ‘Come on, do something!’” Mr Hayakawa said. “It would block trust between them” if the BOJ triggers yen’s depreciation again, he added. 

A key focus of the BOJ’s July gathering is the pace at which it will pare back its bond buying from the current six trillion yen per month. The bank has already said it will announce reductions at its July meeting. 

As the current pace helps the bank maintain its existing level of holdings as bonds mature, a reduction in purchases would mark the BOJ’s first quantitative tightening step after more than a decade of massive monetary easing ended in March.

Mr Hayakawa said the bank may start with a reduction to about 4.5 trillion yen of monthly bond purchases, a slightly bigger cut than the market consensus of five trillion yen. In two years, it could be reduced to three trillion yen, in line with the prevailing market view, he added.

The next rate hike is likely to come this fall, Mr Hayakawa said. Once a stronger economic footing has been confirmed by data, the BOJ may raise the rates as early as September, he said. BLOOMBERG