The market currently anticipates a 70% probability of the Bank of Japan raising interest rates this month—this implies that a rate hike would not come as a surprise, but inaction could potentially roil global markets. The uncertainty stemming from the Iran conflict has kept the central bank from providing clear guidance. Moving forward, several opportunities may arise that could break the deadlock.
The Bank of Japan's statement has left traders with the impression that, despite authorities listing the Middle East conflict as a factor of uncertainty, the central bank will still raise its benchmark interest rate this month. One key question is whether the Bank of Japan will send a clear signal, as it did before recent rate hikes.
The Bank of Japan may not have many opportunities to do so before the policy decision on April 28. The central bank has no major speeches scheduled for any committee members this month, and Governor Kazuo Ueda’s only public speaking engagement is as one of the keynote speakers at a conference on April 13—where governors typically give brief remarks.
How the Bank of Japan communicates its intentions before the April meeting is crucial. Traders currently estimate a 70% probability of a rate hike. Such high expectations imply that a rate increase would not come as a major surprise, but a decision to hold steady could shock already tense global markets due to evolving tensions with Iran.
The Bank of Japan faces high market expectations for a rate hike this month.
Under Kazuo Ueda's leadership, the Bank of Japan has never maintained its policy stance when the market widely anticipated a rate hike. Since the bank began raising rates in March 2024, the highest probability assigned by traders to a rate hike the day before a decision to keep rates unchanged was only 20% (based on overnight swap market pricing).
This indicates that if the Bank of Japan does not plan to raise rates in April, it has urgent work to manage market expectations. Conversely, if the central bank does not attempt to downplay these expectations, it will send a strong signal of an impending rate hike.
To some extent, the Bank of Japan has already provided hints in this regard. Starting last week, the Bank of Japan began releasing new data on potential inflation, output gaps, and the so-called natural interest rate—all of which generally support the case for further rate hikes. The summary of opinions from the March meeting also pointed toward a rate increase.
The Bank of Japan was criticized for causing turmoil in global financial markets in July 2024 when it failed to clearly signal a rate hike, after which it committed to improving its communication practices. Since then, except for January this year, at least one committee member has delivered a speech followed by a press conference each month. The unchanged interest rate decision in January came as little surprise since authorities had just raised rates in December of the previous year.
Before raising rates at the end of last year, Kazuo Ueda explicitly hinted at the possibility of a rate hike during a speech, helping the market almost fully price in this expectation. This allowed the rate hike—which pushed borrowing costs to a thirty-year high—to pass with minimal market disruption. Deputy Governor Ryozo Himino adopted a similar approach ahead of the January 2024 rate hike.
Despite fewer public speaking events this month, the Bank of Japan under Kazuo Ueda's leadership will still have some opportunities to adjust its signaling. The first opportunity will be the branch manager meetings next Monday.
Another potential opportunity may arise during a joint press conference following the G20 meeting in Washington. At such conferences, Kazuo Ueda typically only answers a few questions from journalists alongside the finance minister, who presides over the majority of the session.
Kazuo Ueda can also utilize his appearances in the Diet to communicate with the market. Over the past two years, in addition to routine brief appearances, Ueda participated in an hours-long question-and-answer session in April, during which he explained the Bank of Japan’s policies and economic outlook.
Editor/Doris