(Bloomberg) — The Bank of Japan is expected to keep its benchmark interest rate unchanged this week as concerns over global economic prospects mount due to escalating trade tensions.
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Governor Kazuo Ueda and his fellow board members are set to keep the policy rate at 0.5% at Wednesday’s conclusion of a two-day gathering, according to all 52 economists surveyed by Bloomberg.
The picture of the global economy has dramatically darkened since the board conducted the third rate hike of Ueda’s tenure in January, a meeting held just after Donald Trump began his second term in the White House and made it clear he intended to follow through on the tariff campaign that has since roiled markets and generated widespread uncertainty.
A key focus at this week’s meeting will be any signals from Ueda related to the timing of the next move, as well as any cautionary words over protectionist trade policies and their potential impacts.
While the BOJ remains intent on keeping rates on a gradual upward trajectory, Ueda will probably indicate there’s little need to rush ahead with the next move after last week saying he’s “very much” worried about the global economy.
“The real challenge for Governor Ueda is starting,” said Nana Otsuki, a senior fellow at Pictet Asset Management Japan Ltd. “The BOJ will do its utmost to have markets price in the next rate hike, as the stock market has gotten nervous. It makes sense to expect another hike around the middle this year.”
BOJ officials are leaning toward keeping rates unchanged so they can take time to assess the impact of the January hike as well as weigh the tide of uncertainties sweeping through the global economy, people familiar with the matter told Bloomberg earlier this month.
Domestically, the news is still relatively good. Economic data of late have backed the case for the BOJ to stay on track for further rate increases. The nation’s largest umbrella group for unions said Friday its members had secured pledges from companies for the biggest wage hikes in 34 years, the second straight year that negotiations produced blockbuster results.
The March gathering marks the one-year anniversary since Ueda ended the world’s last negative rate regime as he scrapped the most radical monetary easing program in the modern era. Since then, the governor pressed ahead with two more rate hikes, and bond traders have lately been adjusting their views on how high rates might go.
Japan’s benchmark 10-year bond yields have risen since the January meeting, hitting the highest level since 2008 last week. BOJ watchers raised their projection for the terminal rate to 1.25%, a Bloomberg survey showed. The estimate was only 0.5% a year ago.
“The markets are rapidly pricing in BOJ rate hikes although the BOJ’s stance hasn’t changed,” said Junki Iwahashi, senior economist at Sumitomo Mitsui Trust Bank. “The BOJ must be closely watching steep gains in yields, so close attention will be warranted on Ueda’s comments about that when he speaks at the briefing.”
Political turbulence is another factor that authorities will probably consider. Prime Minister Shigeru Ishiba admitted last week to handing out gift vouchers worth hundreds of dollars to 15 Liberal Democratic Party lawmakers, drawing criticism and setting the stage for his support ratings to sag. Ishiba is expected to lead the LDP in a national election in July.
With households struggling due to elevated inflation and a steady decline in real wages, voters may be unforgiving. They already handed Ishiba’s LDP its worst election result since 2009 last October, not long after Ishiba became premier.
“With household budgets under strain and a new trade war putting a cap on global growth, the outlook for 2025 is diminishing fast,” said Stefan Angrick, senior economist at Moody’s Analytics.
Here is what else to watch for:
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The BOJ typically releases its policy statement around noon and follow that with Ueda’s media briefing at 3:30 p.m.
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Half of BOJ watchers said May 1 is the earliest possible timing for a rate hike in a Bloomberg survey. They will be scouring comments for any sign for the move may come at the next gathering.
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The BOJ will probably reiterate that it’s going to raise rates further if its economic outlook is realized, to clarify that it isn’t done with rate hikes yet.
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The yen. Ueda’s BOJ has kept policy steady nine times, and in seven of those instances the yen later fell as Ueda sought to explain the stand-pat decision, according to analysts Kaoru Shoji and Makoto Noji at SMBC Nikko Securities. Speculators have ramped up yen-long positions to a record high, creating greater downside risk if markets view Ueda’s comments as dovish. They said the dollar could rally rapidly.
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The BOJ is unlikely to make a statement about long-term yields in its statement as it hasn’t done so since unveiling a plan for quantitative tightening in July. Ueda will likely be asked about the bond market at the press conference.
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