BOJ projects inflation near 2 pc amidst yen's fall: Ready for a rate hike

The Bank of Japan (BOJ) announced its decision to maintain ultra-low interest rates on Friday, with the objective of keeping borrowing costs low.

According to Reuters, the central bank, in its quarterly outlook report, projected that inflation would hover near its 2 per cent target over the next three years.

This decision indicates the BOJ's preparation to potentially increase borrowing costs later in the year.

Add WION as a Preferred Source

The BOJ has reaffirmed its stance to purchase government bonds at a monthly rate of approximately 6 trillion yen ($38.45 billion), following the guidance set in March.

As expected, the central bank kept its short-term interest rate target within the range of 0-0.1 per cent, a decision made just a month earlier during its historic departure from a massive stimulus program.

According to the board's projections, core consumer inflation is expected to reach 2.8 per cent for the fiscal year starting in April, gradually narrowing to 1.9 per cent in both fiscal years 2025 and 2026.

The "core core" index, excluding fuel costs, is forecasted to rise to 1.9 per cent in fiscal years 2024 and 2025, before accelerating to 2.1 per cent in 2026.

Market attention has turned to Governor Kazuo Ueda's remarks in the post-meeting press conference, particularly regarding the impact of the weakening yen on the timing of the next rate hike.

The yen's recent depreciation against the dollar, worsened by reduced expectations of an imminent US interest rate cut, has prompted concerns among policymakers.

Despite reassurances from the BOJ that it won't aggressively raise rates following the cessation of eight years of negative interest rates in March, pressure mounts on Ueda to address the currency's decline.

Governor Ueda said that the possibility of further rate hikes remains contingent upon increased wage gains leading to broader price hikes by firms.

This scenario could initiate a cycle of rising wages and prices.

However, Tokyo's core inflation figures, released on Friday, fell below the BOJ's 2 per cent target for April, signalling uncertainty in the price outlook.

Economists are divided on the timing of the BOJ's next rate hike, with some predicting action in the third quarter, while others foresee a potential move between October and December, or even later.

(With inputs from Reuters)