Central bank governor "hints": Is a rate hike in Japan this month "already a done deal"?

The speech by Bank of Japan Governor Kazuo Ueda yesterday further pushed market pricing to focus on a rate hike in June. The core signal is that the central bank is now clearly weighing the risks of rising inflation, rather than just emphasizing economic downside risks.

On Wednesday, in his last scheduled public speech before the June 15-16 policy meeting, Ueda said that even though the situation remains uncertain, as long as the risk of price increases outweighs the risk of a downturn in economic activity, it is necessary to "fully discuss the pros and cons of raising policy rates."

This stance strengthened market expectations for action by the Bank of Japan this month. As of Wednesday afternoon, traders estimate an 85% probability that the Bank of Japan will raise rates by 25 basis points this month. If realized, the benchmark rate would reach its highest level since 1995.

Nomura's research report was more direct: Kazuo Ueda's speech "likely paves the way for a June rate hike by the Bank of Japan," but did not suggest an accelerated pace of tightening. In other words, a rate hike this month is close to being the baseline scenario, but “consecutive hikes” or a single 50-basis-point hike are still not the main line.

Key Phrases Signal Rate Hike

Ueda’s core statements yesterday focused on inflation risk. He said that based on available data and corporate information, the risk of higher prices appeared greater and could materialize earlier.

He also stated that as long as Middle East turmoil eases and inflation gradually reaches the 2% target, the Bank of Japan will raise rates at an appropriate pace. This statement does not directly announce a policy decision, but clearly shifts the focus of the June meeting’s discussions toward a rate hike.

At its April meeting, the Bank of Japan voted 6 to 3 to keep policy unchanged, the most divided vote during Ueda's tenure. This also shows that some committee members worry that if they wait too long, they might fall behind on addressing inflation.

Nomura: Paving the Way for June Rate Hike, But Not Faster Tightening

Nomura pointed out in its June 3 FX intraday commentary that Ueda used the key phrase "fully discuss the pros and cons of raising policy rates," which was also present in his speech last December—after which the Bank of Japan raised rates by 25 basis points that month.

The report also mentioned that Japanese Prime Minister Sanae Takaichi nearly simultaneously stated that the details of monetary policy should be decided by the Bank of Japan. This shows that, at least for the upcoming June meeting, the central bank and the government are aligned.

However, Nomura stressed that the text of the speech did not strongly hint at the Bank of Japan preparing to accelerate tightening—such as consecutive rate hikes in June and July or a one-off 50-basis-point hike. Ueda mentioned the potential risks of delaying a rate hike, but did not indicate that the Bank of Japan is already lagging behind the situation.

This distinction is crucial for markets: A rising probability of a rate hike this month does not mean the future path is fully hawkish.

The Yen May Still Test the 160 Level

Nomura believes that even as expectations for a Bank of Japan rate hike increase, USD/JPY may still test the 160 level again.

During Wednesday’s Asian session, the dollar-yen exchange rate briefly touched 160, as the U.S. military said Iran had launched ballistic missiles at neighboring countries, driving oil prices up sharply. As the situation did not further escalate, the yen pulled back to the high 159s. Following remarks by Sanae Takaichi on FX and Ueda’s speech, USD/JPY briefly approached 159.50.

Key drivers ahead for USD/JPY include market anxieties from government verbal interventions, vigilance about actual intervention, the situation in the Middle East, and how the June FOMC meeting adjusts Fed policy statements. Nomura’s survey showed that as of May 29, 67.7% of respondents expected that if USD/JPY hits 162, Japanese authorities will intervene again.

NISA-related capital flows remain a major source of pressure on the yen. Its cited May high-frequency data show that flows from Japanese investors buying overseas stock funds accelerated compared to April. However, if Japanese households regain interest in domestic stocks, flows to overseas stocks may be somewhat restricted. The Nikkei 225 has recently set record highs for several consecutive days, and retail investors’ focus on Japanese equities may increase.

Japanese Bonds Also Await June Meeting

Aside from rate decisions, the Bank of Japan will also discuss the path for reducing bond purchases this month. Policymakers will assess whether to continue reducing quarterly bond purchases by 200 billion yen in the next fiscal year.

Ueda stated that bond market functionality has improved, and when the central bank decides on a bond purchasing plan at the next meeting, it will consider market stability.

From a capital flow perspective, pension rebalancing may improve the supply and demand for Japanese government bonds. According to its model, if GPIF maintains a 25% allocation to each asset class, cumulative net buying demand for Japanese bonds between May and June may approach 3 trillion yen.

The situation in the Middle East, oil prices, yen movements, government attitudes, and bond market stability will continue to affect the Bank of Japan’s final decision and post-meeting communications. For investors, the focus of the June meeting may not just be "whether to raise rates," but whether the Bank of Japan will signal the pace of the next tightening step. As Nomura interprets, the current answer is: high probability of rate hike this month, but faster hikes have not yet become the baseline.

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