Ueda Speech: BoJ Governor discusses policy outlook after holding interest rate

After the Bank of Japan (BoJ) left the key interest rate and the bond-buying programme unchanged at its June policy meeting, Governor Kazuo Ueda holds a press conference to explain the reasons behind the status quo.

The Japanese Yen is recovering from a six-week low of 158.27 against the US Dollar. At the time of writing, USD/JPY is gaining 0.60% on the day to trade near 158.00.

BoJ press conference key highlights

Important to reduce JGB purchases in a foreseeable manner, while ensuring flexibility to be mindful of stability in bond market.

Reduction of JGB purchases will be considerable volume.

Specific amount, framework of JGB purchase reduction will be decided while listening to market participants' input.

Will start reduction of JGB purchase immediately after deciding at next policy meeting.

Monetary easing from JGB buying's stock effect will continue to work while we reduce bond holdings.

Conceivable to adjust rates earlier if price outlook is revised up or if upside risks heighten.

Decided to put off detailed plan of JGB tapering until next meeting to have considered discussion with markets.

Difficult to say how long bond tapering would last after 1-2 year period.

Govt's JGB issuance plan would follow and take into account BoJ's bond tapering plan.

We announced JGB purchase reduction today to avoid uncertainties until July meeting as much as possible.

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This section below was published on June 14 at 03:23 GMT to cover the Bank of Japan's monetary policy announcements and the initial market reaction.

Following the conclusion of its two-day monetary policy review meeting on Friday, the Bank of Japan (BoJ) board members decided to maintain the key interest rate at 0%.

The decision matched the market expectations.

The BoJ held rates for the second straight meeting in June after hiking for the first time since 2007 in the March meeting.

However, the BoJ did not make any changes to its massive JPY6 trillion ($38.14 billion) monthly Japanese government bonds (JGB) buying programme.

Summary of the BoJ policy statement

Will conduct JGB purchases in accordance with decision made at March policy meeting.

BoJ makes decision on JGB purchases by 8-1 vote.

Decided to trim bond buying to allow long-term interest rates to move more freely.

Will decide on specific bond buying reduction plan for the next 1-2 years at next policy meeting.

Will hold meeting with bond market participants on today's policy decision.

BoJ board member nakamura dissented to decision on JGB purchases.

BoJ's nakamura dissented to decision on JGB purchases, saying bank should decide to reduce it after reassessing developments in economic activity and prices in July 2024 outlook report.

BoJ's nakamura was though in favor of idea of reducing BoJ's purchase amount of JGBs.

Uncertainties surrounding economic, financial developments at home remain high.

Japan's economy has recovered moderately, although some weakness has been seen.

Inflation expectations have risen moderately.

Financial conditions have been accommodative.

Private consumption has been resilient.

Private consumption has been resilient although impact of price rises has remained and auto sales have continued to be pushed down.

Necessary to pay due attention to developments in financial and forex markets.

Underlying CPI inflation expected to rise gradually.

Industrial output has been more or less flat as a trend.

Industrial output continues to be pushed down recently by suspension of production and shipment at some automakers.

Market reaction to the BoJ policy announcements

USD/JPY jumped sharply in a knee-jerk reaction to the BoJ’s policy announcements. The pair is currently trading at 157.75, up 0.45% on the day.

USD/JPY: 15-minutes chart

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This section below was published on June 13 at 23:00 GMT as a preview of the Bank of Japan Interest Rate Decision.

• The Bank of Japan is largely expected to keep its policy rate unchanged.
• Markets’ attention will be on a potential hawkish message by Governor Kazuo Ueda.
• Further announcements could be around JGB purchases.

The Bank of Japan (BoJ) is expected to maintain its short-term rate target between 0% and 0.1% on Friday, June 14, after concluding its two-day monetary policy review meeting for June.

The decision will be announced at 3:00 GMT on Friday. It is worth recalling that, in March, the BoJ raised the interest rate for the first time in 17 years, ending the negative interest rate policy that had been in place since 2016.

What can we expect from the BoJ interest rate decision?

With a steady policy widely expected at this gathering, market participants will keep their attention on the probable changes in the policy statement for fresh hints on the timing of the bank’s next rate increase.

So far, money markets see around 16 bps of hiking in October and nearly 22 bps at the December 19 meeting, according to Reuters.

Data released on Wednesday revealed that Japan's wholesale inflation surged in May at the fastest annual rate in nine months. This indicates that the weak Yen is driving up the cost of raw material imports, thereby exerting upward pressure on prices.

This development complicates the central bank’s decision on the timing of raising interest rates, as price increases driven by cost pressures might reduce consumption, undermining the possibility of achieving the demand-driven inflation the BoJ aims for before further scaling back its stimulus measures.

Also pouring cold water over expectations of extra rate hikes, the National Core CPI approached the bank’s target in April (2.2% YoY), while the Tokyo Core CPI navigated below the inflation goal for the second month in a row in May (1.9% YoY).

Last week, Governor Ueda stated that it would be appropriate to scale back the central bank's bond-buying as it progresses towards ending its extensive monetary stimulus. Ueda also emphasized that the BoJ will proceed "cautiously" in deciding the timing and extent of short-term interest rate increases "to avoid making any significant errors."

In addition, board member Toyoaki Nakamura also argued last week that the central bank should not raise interest rates solely to slow the Yen's decline. He explained that attempting to address the weak Yen through interest rate adjustments would negatively impact the economy, as higher borrowing costs would dampen demand.

Analysts at TD Securities comment: “We expect the BoJ to keep the policy balance rate unchanged at 0% and announce a reduction of their JGB monthly purchases to likely around JPY5tn/mth” 

How could the Bank of Japan interest rate decision affect USD/JPY?

A hawkish surprise by the BoJ could certainly give the Japanese Yen fresh legs and, therefore, sponsor a knee-jerk drop in USD/JPY. The opposite is likely to happen if the central bank disappoints expectations and signals that the next rate hike is still some time away or that the focus remains on achieving the bank’s inflation target before a move higher on rates.

A glimpse at the broader picture shows Fed-BoJ policy divergence remains at center stage. Following the cautious hold by the Federal Reserve (Fed) at its June 12 event and prospects of just one interest rate cut this year (most likely in December), a sustainable move lower in spot does not appear as the most favourable scenario for the time being.

Looking at the techs surrounding USD/JPY, Senior Analyst at FXStreet.com Pablo Piovano suggests that “further advances are expected to target the weekly high of 157.71 recorded on May 29, followed by the 2024 top of 160.20 from April 29.”

On the downside, “the June low of 154.52 (June 4) emerges as the initial target, ahead of the weekly low of 153.60 reached on May 16 and the provisional 100-day SMA at 152.55”, Pablo adds.