Ueda Speech: BoJ Governor speaks on policy outlook after hiking interest rate

Following the Bank of Japan's (BoJ) first historic interest rate hike at the March policy meeting, Governor Kazuo Ueda is addressing a post-policy meeting press conference on Tuesday. 

The Japanese Yen remains under intense selling pressure after the expected rate hike by the BoJ. The decision was in line with the market reaction and, hence, triggered a 'sell the fact' reaction in the domestic currency, sending USD/JPY sharply through the 150.00 level. 

BoJ press conference key highlights

Judged sustainable, stable achievement of 2.0% inflation target comes in sight.

Accommodative conditions will firmly underpin economy, prices.

Will consider options for easing broadly including ones used in past if needed.

Important to keep easy environment in place considering distance to 2% target in terms of inflation expectations.

Pace of further rate hike depends on economy, price outlooks.

Mindful of risks of sudden spikes in interest rates.

Outcome of spring wage negotiations was big factor.

We have come to a phase where we can slowly proceed with possible rate hikes, which I think is appropriate.

If price outlook overshoots or shows possibility of overshooting that could lead to change in monetary policy.

Closely watching whether trend of big wage hikes could broaden among small firms.

Will consider monetary policy response if currencies cause big impact on economy, prices.

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This section below was published on Tuesday at 03:35 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 meeting on Tuesday, the Bank of Japan (BoJ) board members decided to lift the interest rate by 10 basis points (bps) from -0.1% to 0% for the first time since 2007.  

The central bank ended a negative interest rate era that began in 2016. The decision was in line with the market expectations.

Summary of the BoJ policy statement

To guide overnight call rate in range of 0% to 0.1%.

To apply 0.1% interest to all excess reserves parked with BoJ.

To continue its jgb purchases at broadly same amount as before.

To end ETF, J-REIT buying.

To gradually reduce amount of purchases of CP, corporate bond.

To discontinue purchases of CP, corporate bonds in about one year.

BoJ makes decision on long-term JGB buying by 8-1 vote.

Makes decision on asset buying other than long-term JGBs by unanimous vote.

Makes decision on treatment of new loan disbursements under fund-provisiong measuer to stimulate bank lending etc by unanimous vote.

BoJ will nimbly increase JGB buying regardless of monthly scheduled buying amount.

Announces change in monetary policy framework.

Assessed virtuous cycle between wages and prices.

Judged it came in sight that price stability target of 2% would be achieved in sustainable, stable manner toward end of projection period.

Considers QQE, YCC and negative rate policy have fulfilled their roles.

With price target of 2%, BoJ will conduct monetary policy as appropriate.

Will guide short-term interest rate as primary policy tool.

Given current outlook for economic activity and prices, BoJ antiicpates accommodative financial conditions to be kept for time being.

BoJ will continue roughly current amount of JGB buying

Expect to maintain accomodative monetary environment for time being

BoJ judged that inflation-overshooting commitment on monetary base has fulfilled conditions for achievement.

In case of rapid rise in yields, BoJ will make nimble response such as increasing amount of JGB buying.

Japan's economy likely to continue recovering moderately for time being.

Year-on-year increase in CPI likely to be above 2% through fiscal 2024.

Underlying CPI inflation likely to increase gradually toward achieving price target.

There are extremely high uncertainties on Japan's economy, prices.

Must pay due attention to developments in markets, FX, and impact on economy.

BoJ will continue to announce planned amount of JGB buying with range, conduct buying while taking into account of market developments, supply-demand conditions for JGBs.

Market reaction to the BoJ policy announcements

USD/JPY jumped to test 150.00 following the BoJ’s policy announcements. The pair is currently trading at 149.78, up 0.44% on the day. The hawkish policy was widely priced in by the Yen markets.

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This section below was published as a preview of the Bank of Japan Interest Rate Decision on March 18 at 22:00 GMT.

• The Bank of Japan could deliver the first rate hike since 2007.
• Japanese Unions clocked the largest wage increase in over three decades.
• BoJ’s Governor Kazuo Ueda linked monetary tightening with higher wages.
• USD/JPY could collapse towards 146.48 on a hawkish decision. 

The Bank of Japan (BoJ) will announce its monetary policy decision on Tuesday, pretty much at the same time that the Reserve Bank of Australia (RBA) will do the same. Central banks stand out this week, which will also include the decisions of the United States (US) Federal Reserve (Fed) and the Bank of England (BoE).

The BoJ is a particular case, as it is the only central bank maintaining an ultra-loose monetary policy. Interest rates in Japan have been steady at -0.1% since 2016, with policymakers claiming lagging wage increases and doubts about sustainable healthy inflation require continued caution. To keep rates depressed, the BoJ also introduced the Yield Curve Control (YCC) in September 2016, as inflation remained stubbornly below target. 

Bank of Japan Interest Rate Decision: Why this time could be different

Most major central banks embarked on reversing their monetary policy in mid-2022 when inflation soared to multi-decade highs in the coronavirus pandemic aftermath. Interest rates were pushed to record levels, and price pressures receded, although they are still above target. And yet again, central banks are changing course. Market participants expect central banks to start trimming interest rates in the upcoming months, although at a more cautious pace than previously anticipated.

The BoJ’s decision to keep rates on hold was largely linked to depressed wages. However, news over the weekend showed that Japan’s largest group for unions, the Japanese Trade Union Confederation, or Rengo, announced an annual wage increase of 5.28%, the largest raise in over thirty years. BoJ Governor Kazuo Ueda said in the last few weeks that the end of negative rates would depend on such negotiations, and the latest announcement is fueling bets the BoJ will finally leave negative rates.

Meanwhile, core inflation in Japan fell for a third consecutive month in January to its lowest level in almost two years. The core Consumer Price Index (CPI), which excludes fresh food, rose at a slower pace of 2%, matching the central bank’s target. At the same time, the Tokyo CPI rose 2.6% YoY from 1.8% in January, while the core CPI climbed 2.5%, in line with expectations. Such figures could spur concerns about another hold from BoJ, although inflation in Japan is expected to have accelerated in February as the effects of government fuel subsidies faded. The country will report February CPI next Friday, March 22,  and the core annual CPI is foreseen at 2.8%. 

When will the BoJ announce its interest rate decision, and how could it affect USD/JPY?

The Bank of Japan will announce its decision on Tuesday at around 3:00 GMT. However, it is worth reminding that Japanese policymakers do not have a set time like their counterparts, and the announcement could come earlier or later than that. 

The Nikkei newspaper reported on Saturday that “The BoJ began coordinating both within and outside the bank Friday on ending its negative interest rate policy, which was adopted in February 2016. The leading plan is to raise the policy rate, currently at negative 0.1%, by more than 0.1 point to guide short-term interest to the 0%-0.1% range.”

Based on this news, the most optimistic bets aim for a rate hike in the upcoming meeting, up to 0.00%—0.10%, the first rate hike in seventeen years. Policymakers are also expected to end the YCC, although the central bank will need to continue buying bonds.

However, the BoJ is not notorious for its boldness. A more conservative outlook suggests the BoJ will pave the way for a rate hike in April while deciding on a gradual ending to the YCC. 

One more factor is whether the central bank anticipates additional rate hikes in the months to come. Policymakers may well abandon the ultra-loose policy next Tuesday but cool down hopes for the beginning of a tightening cycle at the same time. 

Generally speaking, a hawkish announcement tends to boost the local currency. That said, the market will need to assess the level of hawkishness, if any, of Japanese policymakers to translate it into Japanese Yen (JPY) strength. The USD/JPY pair heads into the announcement trading at around the 149.00 figure, not far from the multi-year high posted in October 2022 at 151.94.

From a technical perspective, Valeria Bednarik, Chief Analyst at FXStreet, notes: “Market participants seem unconvinced the BoJ will pull the trigger this time. The JPY was unable to gather momentum against the US Dollar, and in fact, the pair advanced for a fifth consecutive day. Sellers are aligned around the daily 20 Simple Moving Average (SMA), currently at 149.35, the immediate resistance level. A dovish announcement could push the pair towards the 150.00 mark en route to the 150.60-150.80 price zone.”

Bednarik adds: “Financial markets will be caught off guard if the BoJ actually pulls the trigger. That could result in a massive decline in USD/JPY, initially targeting 148.35, the 100 SMA in the aforementioned daily chart. Once below the latter, the pair can reach the March low at 146.48.”