Rabobank’s Senior FX Strategist Jane Foley notes that earlier market surveys showed a strong chance of a Bank of Japan (BoJ) rate hike this week, but Governor Ueda’s lack of clear hints at IMF/World Bank meetings shifted expectations to June. The BoJ remains cautious, focusing on core inflation and is widely expected to revise up inflation forecasts, which will shape June rate hike expectations.

Core inflation and June hike expectations

"Up until recently market surveys had indicated a strong chance of a BoJ rate hike this week. The lack of a direct hint about an imminent policy move from Governor Ueda when he spoke at the recent IMF/World Bank meetings dashed those expectations and the market has duly re-focused on June. There is clearly good reason for the Bank to remain cautious."

"Ueda has mentioned the hit to Japan’s terms of trade from more expensive energy imports and the related downside risks to the economy. That said, Ueda is fond of reminding the market about the very low level of real rates in Japan which implies that monetary conditions remain extremely accommodative despite the BoJ’s policy tightening programme."

"In view of the relatively firm levels of headline inflation in Japan, this has led to accusations from some parties that the BoJ is behind the curve. However, the BoJ is focussed on its own measures of core inflation, about which it has recently become more transparent. This week, the Bank is widely expected to revise up its inflation forecasts for the current fiscal year."

"Its guidance on core inflation will be particularly important in influencing rate hike expectations for June."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)