Hawkish! Bank of Japan Governor: Interest rates may be raised in July and bond purchases significantly reduced

According to Zhitong Finance, Haruhiko Kuroda, the Governor of the Bank of Japan, stated at the latest press conference that when reducing the scale of bond purchases, it is important to maintain flexibility to ensure market stability, while doing so in a predictable manner. The reduction in bond purchases may be significant, but the specific speed, framework, and extent will be decided after discussions with market participants. Kuroda also mentioned that based on economic data, it is possible that the announcement of reducing bond purchases may coincide with a rate hike at the July meeting.

The Bank of Japan kept interest rates unchanged on Friday but decided to start reducing its massive bond purchase program, gradually exiting from the large-scale monetary stimulus policy. While the Bank of Japan will continue to purchase government bonds at the current pace of around 6 trillion yen (USD 380 billion) per month, the bank decided to announce details of the plan to reduce bond purchases over the next one to two years at the July meeting.

Before the Bank of Japan announced its interest rate decision, media reports citing informed sources suggested that the Bank of Japan might announce a reduction in bond purchases at this meeting. However, the Bank of Japan took a "vague" stance, only stating the intention to reduce bond purchases, while deferring the related issues and specific scale of the reduction to the next meeting.

When discussing the reduction in bond purchases, Kuroda stated, "As we reduce bond purchases, the Bank of Japan's holdings of bonds will decrease. However, the effects of our bond holdings will continue to impact the economy. We do not have a specific timetable - that is, how long it will take for us to (fully) reduce the balance sheet. We have decided to start from a time frame of about one to two years."

Regarding questions about monetary policy support and the timing of rate hikes, Kuroda commented, "If potential inflation acceleration aligns with our forecasts, the Bank of Japan will consider adjusting the degree of monetary support. If the economy and inflation exceed our forecasts, this will also be a reason to raise rates. We will make decisions based on the development of the economy and prices. Of course, we will consider how to reduce the scale of bond purchases."

In response to whether a rate hike and a reduction in bond purchases will be decided in July, Kuroda responded, "Depending on the economic and price situation at that time, it is possible that we will decide to raise rates and adjust the degree of monetary support in July."

Recently, the yield on Japan's 10-year government bonds has risen to around 1%, to which Kuroda commented, "We have recently seen an increase in long-term inflation expectations. Therefore, actual long-term interest rates remain quite low. We still have a sufficiently accommodative financial environment."

Regarding the weakness of the yen, Kuroda stated, "Exchange rate movements will have a significant impact on the economy and prices. Recently, due to changes in corporate wage and price-setting behavior, the impact on prices may intensify. The recent depreciation of the yen has had an impact on pushing up prices, so we are closely monitoring policy guidance trends. We are paying attention to exchange rate fluctuations, the sustainability of measures, and their impact on prices and wages." "This is an issue we need to pay attention to every day and at every policy meeting."

Recently, there have been signs that the weakening yen seems to be pushing cost-push inflation to accelerate again. Ueda and Oto expressed: "Our view has not changed much, that is, cost-push inflation is slowing down, while demand-driven price increases are gradually accelerating. However, there are indeed signs that import prices are accelerating again, partly due to the weak yen. This may be the second round of cost-push inflation. This is an issue we hope to closely monitor when determining potential inflation."

In addition, regarding consumption, Ueda and Oto pointed out: "We expect wages to rise moderately, and inflation to slow down. Therefore, we stick to our view that real household income will gradually increase, leading to stronger consumption."