By Leika Kihara and Makiko Yamazaki
TOKYO, Jan 23 (Reuters) – The Bank of Japan retained its hawkish inflation forecasts on Friday and stressed it will remain vigilant to price risks from a weak yen, signalling that policymakers intend to keep raising still-low borrowing costs in a politically charged atmosphere.
The yen slumped despite the hawkish tone, before suddenly spiking in a move that put traders on high alert for possible currency intervention by Japanese authorities to prop up the ailing currency.
In a press conference after the board’s decision to keep interest rates steady, BOJ Governor Kazuo Ueda said steady wage hikes were prodding more firms to pass on labour costs.
While offering few clues on the next rate-hike timing, Ueda emphasised the need to make timely decisions and not be held back by the collection of hard data, saying the BOJ will tap speedier information such as corporate surveys.
“As prices and wages rise gradually, we are at a phase where we need to scrutinise whether this will continue and if so, at what pace, looking at various data in making our rate decision,” Ueda said at the press conference.
At a two-day meeting that ended on Friday, the BOJ maintained its key policy rate at 0.75% in a widely expected decision after having just hiked the rate from 0.5% in December.
Board member Hajime Takata proposed raising rates for the second straight meeting, which found no other voices in support but highlighted the hawkish momentum within the central bank.
WARY OF YEN, INFLATION RISKS
In a quarterly outlook report, the BOJ painted a more optimistic view of the economy to say a positive cycle of income and expenditure will “gradually strengthen.”
The BOJ raised its growth forecast for fiscal 2025 and 2026, and maintained its view the economy will remain on course for a moderate recovery.
It also revised up its core consumer inflation forecast for fiscal 2026 to 1.9% from 1.8% three months ago, adding that risks to the economic and price outlook were roughly balanced.
In a sign of its caution over the inflationary effects of a weak yen, the central bank said the currency’s moves could prod firms to pass on rising import costs and push up underlying consumer prices.
“We will continue to raise interest rates if our economic and price forecasts materialise. As for our rate-hike path and pace, that will depend on economic, price and financial developments at the time,” Ueda said.
The yen fell to 159.21 per dollar as Ueda spoke, before suddenly rising to around 157.30. Finance Minister Satsuki Katayama declined to comment, when asked after the yen moves on whether the ministry conducted rate checks.
UEDA TONES UP WARNING ON YIELD RISES
The timing of the BOJ’s next rate hike has been complicated by a fresh bout of market volatility caused by Prime Minister Sanae Takaichi’s move to call a snap election next month.
Takaichi’s dovish monetary and fiscal credentials pose a particular challenge for the BOJ given Ueda’s inclination to normalise policy after decades of stimulatory rates.
In contrast to his nuanced remarks on the rate-hike path, Ueda was more forceful in warning investors against pushing up bond yields too much.
“Long-term interest rates are rising at quite a fast pace,” Ueda said, when asked about recent sharp rises in bond yields.
“As we’ve been saying, we are ready to take nimble action to cope with exceptional, unusual moves. We will communicate closely with the government and stand ready to play each of our roles,” Ueda said, without elaborating on what tools the BOJ could use.
The BOJ has been tapering bond buying since 2024 under a pre-set, moderate pace. It has said it could suspend this tapering or conduct emergency bond-buying operations in times of extreme market stress.
Analysts say the hurdle for taking such emergency steps is high as doing so would roll back Ueda’s efforts to normalise monetary policy.
“Governor Ueda is known for not being very straightforward, so it’s no surprise that markets weren’t quite sure what to do,” said David Chao, global market strategist for Asia-Pacific at Invesco in Singapore.
“The yen weakened while the rates market started to price in a higher chance of an April rate hike. Ultimately, I think currency markets started to follow the rates market in believing that a rate hike is in the offing,” he said.
Analysts polled by Reuters in January expect the BOJ to wait until July before raising rates again, with more than 75% of them expecting it to climb to 1% or higher by September.
Japan’s economy has weathered the hit from U.S. tariffs and is likely to get a lift from Takaichi’s stimulus package.
But the premier’s vow to strengthen her expansionary fiscal policy and suspend the 8% sales tax on food has stoked fears of additional debt issuance, leading to the spike in bond yields, which could hurt the economy.
The central bank is thus caught between a need to keep yen bears at bay with hawkish communication, without triggering further rises in bond yields on expectations of hefty spending by Takaichi’s government.
(Reporting by Leika Kihara and Makiko Yamazaki; additional reporting by Kantaro Komiya and Satoshi Sugiyama; Editing by William Mallard and Shri Navaratnam)
