While we enjoy the bank holiday tomorrow morning, the Bank of Japan will be holding its May monetary policy meeting. Having raised its key interest rate from 0.25% to 0.5% in January, the Bank of Japan then decided to pause in March. I expect it to leave the key interest rate unchanged tomorrow, Commerzbank’s FX analyst Volkmar Baur notes.
BoJ seen holding rates amid tariff uncertainty
“Although the Bank of Japan has repeatedly stated in recent weeks that it intends to raise interest rates further if the economy develops as expected, this expectation has been called into question since at least ‘Liberation Day’ in the US four weeks ago. It will therefore be interesting to see how the Bank of Japan assesses the tariff developments and their potential impact on international trade and the Japanese economy.”
“It is quite possible that the Bank of Japan will consider various scenarios in its outlook tomorrow, as the Bank of Canada recently did. After all, it is still unclear exactly how high the US tariff rate on Japanese imports will be once the 90-day grace period expires in 60 days’ time. The same applies to the tariff rates for other Asian economies. In short, there is simply too much uncertainty at the moment to raise interest rates again tomorrow.”
“Especially since there is no reason to rush. Inflation has risen slightly again recently. However, looking at wages and service inflation, there is still no evidence of a structural inflation problem. The market agrees, currently pricing in only a very low probability of a key interest rate hike. Therefore, USD/JPY is likely to continue being driven more strongly by the US dollar. I therefore expect the USD/JPY exchange rate to rise again in the coming weeks, as the USD recovers slightly and the JPY weakens.”