Hideo Ueda faces a major communication test: the market expects no interest rate hike in April, and the weak yen is approaching the intervention red line.

Market expectations are generally that the Bank of Japan will keep interest rates unchanged on April 28 (Tuesday), presenting a challenge for Governor Haruhiko Kuroda, as the struggling yen is hovering near levels that previously prompted intervention by authorities. Just a few weeks ago, markets and economists were betting that Kuroda and his board would continue their normalization efforts and raise rates again at the end of the two-day meeting on Tuesday. However, with the U.S. President Trump's war with Iran causing a spike in oil prices, these bets gradually dissipated, and currently the market sees only a 7% chance of action being taken, with many economists now predicting a rate hike in June. Assuming no surprises - given that decisions are said to be made at the last minute, this possibility cannot be ruled out - the focus will quickly shift to Kuroda's policy signals. The statement is usually released around noon Tokyo time, with Kuroda's press conference typically starting at 3:30 pm. "The key is how strongly the Bank of Japan will convey its determination to continue raising rates to curb the depreciation of the yen," said Takehito Yuge, former head of the international department at the Bank of Japan. In early trading on Monday, the yen was hovering around 159.50 against the dollar in Tokyo, not far from the level last supported by authorities in 2024. Last Thursday, Japanese Finance Minister Taro Aso warned that officials are maintaining a high vigilance against speculative activities to suppress the yen and are staying in close contact with their U.S. counterparts around the clock. Bloomberg Economic Research reports, "The stimulus-friendly government led by Takanori Hisa pressurizes to keep interest rates unchanged, which may lead to the shelving of rate hike plans... With Middle Eastern inflation sweeping Japan, keeping rates deep in the stimulus range damages its independence. We expect a rate hike in June." Last week, sources revealed that amid the uncertainty caused by the Iran conflict, the Bank of Japan leans towards leaving the policy rate unchanged at 0.75%. They stated that officials are still committed to eventually raising borrowing costs. However, differing views suggest that the divergence among the nine board members may widen, as they voted 8-1 at the last meeting in March to maintain policy. The volatility related to the conflict with Iran has intensified uncertainty in energy costs and supply chain resilience, making it difficult for policymakers to decisively implement the next rate hike. "The Bank of Japan's hawkishness in communication is limited," said Naoya Matsuzawa, chief strategist at Nomura Securities. "It is still unclear whether Japanese authorities can curb the depreciation of the yen and steepening of the bond yield curve before the next meeting in June." Last week, speculation surrounding potential intervention limited downside risks, causing the implied volatility of yen three-month options to fall to the lowest level in two years. Market participants vividly remember the press conference held by Kuroda after maintaining policy unchanged in April 2024. The governor's comments on the yen were interpreted as dovish, causing the currency to plummet and eventually leading to intervention by authorities a few days later. Kuroda will strive to avoid repeating history this week. The Federal Reserve and the European Central Bank will also hold meetings this week, with market expectations generally indicating that they will stand pat. The pressure on the Bank of Japan to normalize monetary policy partly stems from the ongoing policy divergence with other central banks and the fact that real interest rates remain deeply negative after accounting for inflation. The latest quarterly economic outlook, to be released alongside the policy statement, should help provide a basis for its ongoing hawkish stance. Sources earlier this month suggested that the Bank of Japan's board may consider significantly raising price expectations for the fiscal year starting this month, with the latest forecast at 1.9%. "Given the increasingly active pricing behavior of businesses and the escalating pressure of yen depreciation, we believe the risk of price hikes outweighs the impact on economic growth," said Shota Morishiro, senior economist at SBI Sumishin Net Bank Ltd. Data released last Friday showed that Japan's inflation rate accelerated for the first time in five months in March. Another indicator showed that the services producer price index rose by 1.25% month-on-month, the largest increase in about 36 years, excluding the period of consumption tax hikes. Meanwhile, consumer confidence suffered its largest drop since the outbreak of COVID-19, indicating that demand is about to face an imminent blow. Analysts estimate that the Bank of Japan will downgrade its growth forecast for this year from 1% to 0.8%. "Observing how the economic outlook is revised will be crucial in evaluating how policymakers view the downside risks to economic growth from rising oil prices, and how these risks in turn affect potential inflation," said Naoya Hasegawa, chief bond strategist at Okasan Securities. Kuroda enters his fourth year as governor this month. During this period, he abolished yield curve control, ended negative interest rates, and raised the policy rate to its highest level in thirty years. "He only has two years left," said former chief economist of the Bank of Japan, Shuntaka Sekine. "He has done what he had to do, and he will continue to do so when necessary."