BOJ Deputy Governor Hints at Rate Hike...Potential Split with Takaichi

BOJ Deputy Governor Stresses Need for "Policy Adjustments"

Japanese Government in a Hurry Amid Bond Sell-Off

New Inflation Indicator Seen as Rationale for Rate Hike

Bank of Japan (BOJ) Deputy Governor Ryozo Himino suggested the possibility of a policy rate hike on May 26, stating that "appropriate policy adjustments" are necessary to maintain market confidence. This stance contrasts with Japanese Prime Minister Sanae Takaichi, who has expressed concerns about war-driven inflation and urged the BOJ to cooperate, drawing attention to the central bank's upcoming decision next month.

On April 28, the Japanese flag is flying in front of the Bank of Japan (BOJ) Tokyo headquarters. Photo by AFP Yonhap News.

Deputy Governor Himino said during a parliamentary Q&A session that day, "I believe it is important to maintain market confidence in inflation control by adjusting the degree of monetary easing according to the state of the economy and prices."

Bloomberg News interpreted these remarks as an indication that there is openness to a rate hike in the near future. Deputy Governor Himino, along with BOJ Governor Kazuo Ueda and other board members, has consistently argued that the central bank must show a responsible attitude toward financial markets.

However, this policy direction is the exact opposite of Prime Minister Takaichi's wishes. Last week, Prime Minister Takaichi reportedly conveyed her position that the BOJ should maintain its monetary easing policy to mitigate the shock from the Middle East war. After meeting with the prime minister on May 22, Governor Ueda stated, "The prime minister said she hopes the BOJ will consider measures to address inflation and strengthen the economy."

The market is increasingly expecting a rate hike. Recently, under pressure from war-driven inflation, Japanese government bond yields have surged. On this day, the yield on 10-year Japanese government bonds stood at around 2.7290%. Although this is lower than the 2.8% recorded on May 19, it is still among the highest in the past year. Bond yields move inversely to price. Additional upward pressure on yields is also coming from speculation that fiscal spending may increase, as Prime Minister Takaichi has called for a supplementary budget to ease the burden on households.

Foreign media reported that the new inflation indicator released by the BOJ that day is also expected to provide grounds for a rate hike decision. According to the BOJ, the core consumer price index (CPI) excluding one-off factors such as education and energy subsidies rose 2.8% in April, surpassing the BOJ's 2% target. This figure is higher than the 2.5% recorded in March. It also far exceeds the existing core CPI inflation rate of 1.4% announced by the Japanese government last week. The BOJ has been releasing this new indicator since March.

The market is assigning a high probability to a BOJ rate hike at next month's meeting. According to the swap market, the probability of a BOJ rate increase in June exceeded 80% last week. After the meeting on May 22, it slightly declined to around 76%.

The BOJ's policy direction is expected to become clearer in Governor Ueda's speech scheduled for 9 a.m. on May 27. After raising the rate from "around 0.5% per year" to "around 0.75% per year" last December, he left rates unchanged for three consecutive meetings in January, March, and April. The next monetary policy meeting will be held from June 15 to 16.

This content was produced with the assistance of AI translation services.