“It is quite possible that the bank will raise the policy interest rate from the next monetary policy meeting onward, even if the future course of the situation in the Middle East remains unclear,” one board member said, according to a summary of opinions from the April meeting released Tuesday.
Governor Kazuo Ueda’s board voted 6-3 on April 28 to hold policy settings unchanged, an unusually divided outcome that pointed to momentum building for a rate increase when authorities next set policy on June 16. Traders see a 77% chance of a hike at that time, according to pricing in the overnight interest rate swaps market, with the summary supporting that speculation.
While the summary doesn’t disclose who said what, several opinions pointed to high vigilance over upside inflation risks and the need to move rates higher even if the conflict between the US and Iran persists. Uncertainties stemming from Middle East developments were a key factor in the decision to hold last month.
“If tension over the situation in the Middle East becomes prolonged, there will be a need to raise the policy interest rate to the level of the neutral interest rate at an earlier timing to prevent underlying inflation from deviating upward,” one member said.
The release of the summary came on the same day US Treasury Secretary Scott Bessent was set to meet with several officials in Tokyo, including Prime Minister Sanae Takaichi, who has in the past spoken against the idea of raising interest rates. Bessent has urged the government to give the BOJ space to raise rates to avoid falling behind the curve in fighting inflation.
Finance Minister Satsuki Katayama reiterated the standing policy that the particulars of monetary policy should be left to the BOJ after she met earlier with Bessent.
The BOJ is unique among central banks in the Group of Seven economies in that it’s contending with the geopolitical shock from the Middle East while in the process of bringing rates higher to a neutral level from the current 0.75%, the lowest among major economies.
“Japan’s real policy interest rate is by far at the lowest level globally, and it is necessary for the bank to continue to adjust the negative real interest rate in preparation for the second-round effects of price rises,” one member said.
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At the gathering ended on April 28, the BOJ raised its inflation outlook substantially more than BOJ watchers expected. At his post-meeting press conference, Ueda sent some hawkish signals, though he wasn’t able to keep the yen from losing ground against the dollar.
Japan’s Ministry of Finance likely intervened in the currency market to prop up the yen in recent weeks after the yen weakened beyond the key threshold of 160 per dollar. The yen’s lingering weakness makes it risky for the BOJ to make any dovish sounds.
A cabinet office official representing the government at the BOJ meeting highlighted the significance of handling of monetary policy.
“Toward achieving both strong economic growth and stable inflation, it is important that monetary policy be conducted as appropriate,” the official said.
