BOJ to hold rates with focus on hawkish signals to buoy yen

The Bank of Japan is widely expected to leave its benchmark interest rate unchanged Friday, with investors focusing on any hints of a less dovish tilt as the yen trades around a 34-year low.

Gov. Kazuo Ueda and his fellow board members are set to keep the short-term rate around 0 percent to 0.1 percent at the end of their two-day policy meeting, after the central bank called time on its massive monetary easing program last month, according to all but one of 53 surveyed economists.

Just five weeks since that monumental shift, Ueda faces the challenge of striking a delicate balance between putting a floor under the yen while also supporting a fragile economic recovery.

The yen surprised Japanese authorities by retreating even after Japan conducted its first rate hike since 2007. The weak currency could spur cost-push inflation, and some executives at businesses that benefited from the depreciation of the currency have started to express concerns about the overall impact.

That has sharpened the focus of market players on whether the bank might send a clearer signal of policy normalization this time around.

“The risk is rising for a frontloading of a rate hike in June or July,” said Ryutaro Kono, chief Japan economist at BNP Paribas SA. “The yen is likely to keep falling gradually,” as the government views intervention as insufficient to shift the tide in light of strong US economic data and escalating geopolitical risks in the Middle East, he said.

Japan’s finance minister reiterated warnings against excessive currency moves during an appearance in parliament Tuesday.

“I think it’s fair to assume that the environment for taking appropriate action on forex is in place, though I won’t say what the action is,” Shunichi Suzuki said.

The BOJ’s latest quarterly inflation forecasts and its characterization of the risks to its view are among the easiest ways the central bank could flick at the possibility of earlier rate hikes. Other potential areas include its bond-buying plans and the language the central bank uses to describe its purchases, according to some market watchers.

Gov. Ueda hasn’t ruled out responding to exchange rates with a policy move if the impact on prices is seen to be “non-negligible.” (Bloomberg)