MNI POLICY: Weak Yen Boosts Probability Of July BOJ Rate Hike

The Bank of Japan might be able to raise the policy rate to 0.25% by as soon as its July 30-31 meeting, so long as private consumption continues on the track to recovery, as yen weakness increases upside risks to prices and boosts the chances of sustainably reaching the 2% target, MNI understands.

While the BOJ’s Board had previously leaned towards waiting for wage and consumption data due in August and October before taking its next move, Bank officials are increasingly moving towards the view that rising import prices will make firms more likely to pass on higher costs, and will argue that survey information and BOJ branch intelligence ahead of October price changes could be sufficient to justify an earlier hike. (See MNI POLICY: BOJ To Consider Soft Yen Price Impact, Hikes Delayed)

Still-weak private consumption will be key. BOJ officials have noted somewhat increased supermarket sales, but continue to gauge whether consumers – already grappling with inflation and negative real wages – accept further price hikes. The yen reached a 34-year-low 160 to the dollar in April, though it has since stabilised and its impact has been mitigated by falling crude prices in the past few months.

ELECTORAL CALCULATION

The BOJ board will update its medium-term economic growth and inflation view through the quarterly Outlook Report at the July meeting after June Tankan survey results on July 1 and the branch managers’ meeting in mid-July.

Another reason for choosing to act in July would be to avoid colliding with any upcoming snap national election.

Prime Minister Fumio Kishida said Tuesday he would not dissolve the Lower House during the ongoing parliamentary session and would make a final decision on calling an election when the current Diet session ends on June 23.

Kishida will explore options to dissolve the lower chamber if he is reelected the president of the Liberal Democratic Party sometime in September. Lower house members' current terms end in October 2025.

The Board will next meet June 13-14, and is also likely to consider a reduction in its government bonds purchases from around JPY6 trillion a month, barring further yen weakening. (MNI POLICY: BOJ Mulls Cut In Bond Buys As Early As Next Week)