BOJ April Decision: Hawkish Pause to Pave Way for June

The market widely anticipates that the Bank of Japan will keep the overnight call rate target at 0.75% unchanged in the upcoming monetary policy meeting on April 27-28.

Due to the prolonged tension in the Middle East and supply-side uncertainties, the market-implied probability of a rate hike in April has already dropped below 5%. Recently, insiders said that there are no signs of the Middle East conflict ending in the short term, and the uncertainty surrounding Japan's economic and inflation prospects has significantly increased.

Inaction does not equate to turning dovish. JPMorgan expects this meeting to present a "hawkish hold" pattern, where the Bank of Japan maintains the existing interest rates while still leaving ample room for a rate hike in June.

Morgan Stanley holds a similar view, arguing that although the policy remains unchanged, it leans hawkish because Japanese interest rates are still in a loose range, and the central bank's patience in watching the impact of the conflict is relatively limited.

Middle East Variable: Intensifying Inflation Rather Than Curtailing Tightening

Unlike the logic faced by most central banks, the Middle East conflict may not be a reason for the Bank of Japan to delay rate hikes; instead, it could potentially accelerate the tightening pace.

Japan is highly dependent on Middle East energy imports, and soaring oil prices directly push up domestic inflationary pressures. Goldman Sachs predicts that energy price inflation will markedly increase in April—the upward impact of exiting electricity and gas price control measures is likely to exceed the downward offset of exiting gasoline price control measures, propelling core CPI (excluding fresh food) year-on-year to +1.9%, up 0.2 percentage points from March.

This places the Bank of Japan in a dilemma, where inflationary pressures demand monetary policy tightening, but external geopolitical risks require cautious observation. Insiders point out that the central bank needs more time to assess the actual impact of conflicts on the economy and prices before determining the next policy direction.

The Market Focus Shifts to June: Forward Guidance and Outlook Report as Key

Although the expectation for a rate hike in April has essentially fallen through, the probability of a rate hike in June remains high at about 70%. Market interest rate pricing also reflects this expectation, having been adjusted from an implied 44 basis points rate hike on February 27 to 48 basis points on March 13.

Insiders reveal that if the Bank of Japan stands pat this month, it may use this opportunity to release forward guidance for an earliest rate hike in June, in response to the persistent accumulation of inflation pressures.

Therefore, the focus of this meeting is not limited to the interest rate decision itself; Kuroda's speech tone, the upcoming economic outlook report, and the wording on inflation and economic prospects in the policy statement will all become key clues for the market to interpret the policy direction for June.

It is worth noting that the Bank of Japan is the only central bank among the G7 still in a rate-hiking cycle. Against the backdrop of other major central banks generally leaning towards observation or even considering rate cuts, the hawkish stance of the Bank of Japan makes its policy path distinctly different from its G7 peers. Although it is highly probable that it will remain unchanged in April, a well-designed "hawkish pause" is sufficient to lay the groundwork for action in June.