By Leika Kihara
TOKYO (Reuters) -The Bank of Japan is expected to keep interest rates steady next week and consider slowing reductions in its bond purchases from next fiscal year, a move that would signal its preference to move cautiously in normalising still-easy monetary policy.
But BOJ Governor Kazuo Ueda may deliver a less dovish tone on the interest rate outlook on prospects of a de-escalation in global trade tensions caused by U.S. President Donald Trump and persistent sticky domestic food inflation, analysts say.
“If trade negotiations between countries proceed and uncertainty over trade policies diminish, overseas economies will resume a moderate growth path. That, in turn, will accelerate Japan’s economic growth,” Ueda said in a speech last week, signaling the BOJ’s readiness to keep raising rates.
At its two-day meeting ending June 17, the BOJ is widely expected to leave its short-term policy rate unchanged at 0.5%.
Markets are focusing on the board’s review of an existing bond-tapering plan running through the March end of the current fiscal year, and the announcement of a new programme that will likely extend through fiscal 2026.
Sources have told Reuters the BOJ will make no big changes to the current taper plan and consider slowing the pace of tapering from next fiscal year – a move that signals a preference to avoid big market disruptions.
Many analysts expect the BOJ to cut its quarterly taper size to around 200 billion yen from fiscal 2026, half the reduction under the current plan laid out last year.
“The taper process has gone smoothly so far, though it makes sense to give markets some room for breather,” said a source familiar with the BOJ’s thinking.
“The BOJ’s basic approach is to allow market forces to drive yield moves,” a second source said. “But it must also ensure its bond tapering doesn’t cause big disruptions in the market.”
RICE INFLATION IN FOCUS
The BOJ ended its yield curve control and began tapering its huge bond buying last year as part of its effort to wean the economy off a decade of massive stimulus. It also raised short-term rates to 0.5% in January on the view Japan was making progress towards durably achieving its 2% inflation target.
While risks to Japan’s export-heavy economy from U.S. tariffs have pushed backed market bets on the next rate-hike timing, investors are on the lookout for any clues from Ueda on how soon rate increases could resume.
Ueda is expected to hold a news conference at 3:30 p.m. (0630 GMT) on June 17 to explain the BOJ’s policy decision.
The BOJ sharply cut its growth and inflation forecasts at the previous meeting on May 1, when market volatility was at its peak due to fears Trump’s threats of higher tariffs could tip the global economy into recession.
While Japan has yet to reach a trade deal with the U.S., market jitters have calmed somewhat as Washington takes a more conciliatory tone in trade negotiations including with China.
Some analysts say the BOJ may not be able to afford pausing rate hikes for too long due to inflationary pressure from stubbornly high food costs, particularly for Japan’s staple rice.
Japan’s core inflation has exceeded the BOJ’s 2% target for over three years and hit a more than two-year high of 3.5% in April due largely to a 7% spike in food prices.
While Ueda has predicted a moderation in food inflation, he warns that persistent cost pressures could affect public perceptions of future price moves – signaling the BOJ’s growing attention to the risk of too-high inflation.
Japan was now experiencing a second round of food price inflation driven by supply shocks, which adds to inflationary momentum from higher wages, Ueda said.
“Given that underlying inflation is closer to 2% than a few years ago, we need to be careful about how food price inflation will impact underlying inflation,” he said a speech on May 27.
“Through Ueda’s speech comments, the BOJ appears to be fine-tuning its communication somewhat by flagging not just downside but upside risks” to growth and inflation, said Mari Iwashita, executive rates strategist at Nomura Securities.
(Reporting by Leika Kihara; Editing by Sam Holmes)
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