FOCUS: BOJ’s Ability to Control Inflation to Be Tested

Tokyo, June 16 (Jiji Press)–The Bank of Japan decided Tuesday to raise its policy interest rate by 25 basis points to a 31-year high of around 1 pct while its governor, Kazuo Ueda, was absent due to his hospitalization for an illness. With uncertainty persisting over the Middle East situation, crude oil prices are expected to remain high. Despite the rate hike decision, the yen failed to rise against the dollar in Tokyo foreign exchange trading. Financial markets and others are closely watching whether the central bank can put inflation under control. On Tuesday, Shinichi Uchida, one of the deputy governors of the BOJ, attended a press conference after the bank’s two-day monetary policy meeting on behalf of Ueda, who is undergoing treatment for a liver cyst infection at a hospital. Uchida said that the BOJ decided on the rate increase because the possibility of an economic slowdown has receded thanks in part to progress in the procurement of oil-related products from sources other than the Middle East amid the growing risk of further price rises. Ueda was hospitalized June 9, about a week before the latest BOJ policy meeting. Uchida himself was hospitalized last November because of leukemia treatment and was discharged from the hospital only late last month. The latest rate hike decision was made under such an unusual situation. Of the BOJ Policy Board’s eight members available Tuesday, excluding Ueda, seven voted for the hike while the remaining one opposed. The BOJ decision came against Prime Minister Sanae Takaichi’s cautious stance over an interest rate hike by the central bank. While the BOJ had faced difficulties obtaining understanding from the prime minister, U.S. Treasury Secretary Scott Bessent’s visit to Japan last month gave his blessing to the struggling Japanese central bank. At a meeting May 12, Bessent is believed to have advised Takaichi that she should not block an interest rate hike by the BOJ. Ueda told reporters after meeting with Takaichi May 22 that he and the prime minister had “a meaningful exchange of opinions.” But a source who was familiar with the meeting said that Takaichi and Ueda failed to narrow the gap between them. The BOJ then tried to explore whether a representative of the government participating in a BOJ policymaking meeting would exercise its right to request the central bank to postpone a vote if it proposes an interest rate hike. After the BOJ assessed that Takaichi was not in favor of a rate hike but would not openly oppose it, Ueda said in an address on June 3: “I think the bank will continue to raise the policy interest rate at an appropriate pace. Meanwhile, even if the situation remains unclear, should it be judged that upside risks to prices outweigh downside risks to economic activity, it will be necessary to thoroughly discuss the pros and cons of raising the policy interest rate.” The remarks accelerated market players’ moves to price in an interest rate hike by the BOJ. A senior BOJ official said the remarks were adopted after careful consideration. The BOJ has successfully paved the way for carrying out an interest rate hike unless unexpected events occur, such as the conflict in the Middle East intensifying. “We will lose trust as a central bank if we do not raise interest rates after having the market price in this much,” another senior BOJ official said. Although the United States and Iran on Sunday agreed to end their conflict, it remains unclear whether the supply disruptions for crude oil and petroleum products such as naphtha will be resolved. The BOJ will continue to bear the heavy responsibility of containing severe inflation and realizing its goal of stabilizing consumer price growth at 2 pct, BOJ watchers said. END [Copyright The Jiji Press, Ltd.]