BOJ chief avoids hints of April rate hike, shattering hawkish market bets

By Leika Kihara

WASHINGTON, April 16 (Reuters) - Bank of Japan Governor Kazuo Ueda steered clear of signalling a rate hike was on the cards this month, instead highlighting the country's low real interest rates and robust corporate profits, heightening the chance it will hold fire at least until June.

Japan is facing rising inflation from a "negative supply shock," which is more difficult to rein in with monetary policy than inflation driven by strong demand, Ueda said.

The best approach to such a shock would vary from country to country, Ueda told a press conference after attending the International Monetary Fund (IMF) meetings in Washington.

"Having said that, I would note that Japan's real interest rate is currently low up to the medium-term zone of the yield curve," Ueda said. "We must also take into account the fact Japan's financial environment is accommodative."

The remarks will keep traders guessing on the timing of the next rate hike, with the lack of a clear signal leading markets to reduce bets of a rate increase at the BOJ's April 27-28 policy meeting.

"In the past few rate hikes, the BOJ dropped hints to lay the groundwork for a policy shift. The fact there was no such hint today means an April hike may be off the table," said Kazutaka Maeda, an economist at Meiji Yasuda Research Institute.

Recent hawkish communication from the BOJ led markets to bet on roughly a 70% chance of an April rate hike earlier this month, before tumbling to 30% after Ueda's speech on April 13 gave no clear hint of an imminent policy shift and highlighted risks to the economy from the Middle East conflict.

Market pricing of an April rate hike slid further to around 10% after Ueda's remarks in Washington.

ROBUST CORPORATE PROFITS

After attending the G7 and G20 finance leaders' gatherings held on the sidelines of the IMF meetings, Ueda said many policymakers were of the view that uncertainty stemming from the Middle East conflict remained high.

While rising crude oil prices would hurt the economy by worsening Japan's terms of trade, this pressure must be weighed against robust corporate profits and the boost to growth from the government's stimulus measures, he said.

"If the economy slows, that would put downward pressure on prices. On the other hand, rising crude oil prices would put upward pressure on underlying inflation through inflation expectations," he said.

"Taken together, we will make a decision at each policy meeting using data and information available at the time," Ueda said. "Our decision will be based on the likelihood of our projections materialising, as well as the risks."

The BOJ ended a decade-long, massive stimulus programme in 2024 and raised rates including in December, when it took borrowing costs to a 30-year high of 0.75%, on the view that Japan was making progress in durably achieving its 2% inflation target.

Ueda has repeatedly stressed the BOJ's readiness to continue raising rates if the economy and prices keep pace with its forecasts.