BOJ keeps rates steady, delivers hawkish signal as government props up yen

The Bank of Japan maintained interest rates at 1% but signalled a potential for future rate hikes, following Japan's failed yen-buying intervention and US Treasury Secretary's supportive comments.

The Bank of Japan kept interest rates steady on Friday but signaled its resolve to continue pushing up borrowing costs, in the wake of the government's yen-buying intervention overnight that failed to give the sagging currency lasting support.

Japan conducted yen-buying, dollar-selling market intervention in ‌New York markets on Thursday, a market source said, though the yen's rebound proved short-lived. In a sign Tokyo's action had the blessing of Washington, U.S. Treasury Secretary Scott Bessent said Japan may have intervened to prop up its yen currency that looked "very undervalued," according to a Fox Business Network reporter.

The government's action and comments by Bessent, who has repeatedly urged the BOJ to raise rates, puts the market's focus on how ‌hawkish Governor Kazuo Ueda could be on the future rate path in his post-meeting news briefing. At the two-day policy meeting that ended on Friday, the BOJ kept short-term interest rates steady ‌at 1% in a widely expected move after a hike to the 31-year-high level just last month.

Board member Hajime Takata was the sole dissenter to the decision, calling for a rate hike to 1.25% to respond to inflationary risks from external demand shocks. "The BOJ will continue to raise the policy rate and adjust the degree of monetary accommodation in response to developments in economic activity and prices as well as financial conditions," the BOJ said in a statement announcing the decision.

Developments in the ⁠Middle East, ​expansion in AI-related demand and exchange-rate developments will be ⁠among factors the BOJ will look at in considering the timing and pace of future rate hikes, it said. The BOJ meeting follows that of the U.S. Federal Reserve on Wednesday, which kept rates steady albeit with three dissenters calling for a quarter-percentage-point ⁠hike.

WEAK-YEN RISK The BOJ raised rates to a 31-year high in June and signaled its readiness to tighten further as it focuses on taming price pressures from the energy shock. Most analysts polled by Reuters expect the BOJ to ​raise rates again to 1.25% by year-end.

The slow pace of rate hikes has been blamed for pushing the yen to a 40-year low, leading to rising import costs that ⁠hurt households and retailers. Japan's yen-buying intervention, first reported by the Nikkei newspaper, would be the first since Tokyo's record $73 billion yen-buying spree between late April and early May that had little effect in reversing the currency's downtrend.

Japan's top currency diplomat Atsushi Mimura on ⁠Friday declined ​to comment on intervention but hinted at U.S. involvement in the effort to stem the yen's decline, including so-called rate checks by the Fed. He said Tokyo was communicating closely with South Korea, which also conducted dollar-selling intervention on Thursday.

BOJ chief Ueda may need to talk down yen bears through hawkish communication, analysts say, as prospects of U.S. rate hikes weigh on the yen's value against ⁠the dollar. But pressure from a dovish administration and the potential economic hit from a 7.1-magnitude earthquake this week in the southern prefecture of Kumamoto, home to plants of major manufacturers and chipmakers, may ⁠dampen the hawkish mood.

So far, the economy appears ⁠to have weathered the hit from rising fuel costs and supply disruptions from the Middle East conflict, which are driving up inflation. Factory output rose in June and manufacturers projected further increases this month and next, data showed on Friday.

Separate data also showed annual core inflation in Japan's capital accelerated to ‌1.7% in July, a sign of ‌broadening price pressures from the Middle East conflict.