The final speech released a strong signal! Bank of Japan Governor Haruhiko Kuroda said "we must fully discuss raising interest rates." The probability of action by the Bank of Japan in June has soared to 85%.

In the final scheduled public speech before the monetary policy meeting of the Bank of Japan this month, Governor Haruhiko Kuroda sent a strong signal of raising interest rates. He explicitly stated that if the risk of inflation exceeding the risk of economic growth downturn, the central bank must seriously consider the advantages and disadvantages of raising interest rates, and the market interpreted it as a "last-minute push" for a rate hike in June. Speaking at a forum in Tokyo on Wednesday, Kuroda pointed out that the significant energy impact resulting from the conflict in the Middle East requires the central bank to be more vigilant about the risk of inflation overshooting. "Japan is in a phase where there is a higher potential for potential inflation overshoot due to the second-round effects of rising oil prices," Kuroda said. "We need to make future policy decisions based on this premise." He further warned that the price pressures caused by the energy impact may not be temporary and could push potential inflation beyond the level forecasted by the central bank. If the economic and price trends align with the central bank's baseline scenario, the Bank of Japan will continue to gradually raise policy rates at an appropriate pace. More crucially, he stated, "Even though the situation in the Middle East remains unclear, if we judge that the risk of inflation rising is greater than the risk of economic activity slowing down, we must thoroughly discuss the pros and cons of raising policy rates." When asked about the possibility of a rate hike in June, he reiterated his position. Kuroda's speech indicates a high probability of an interest rate hike by the Bank of Japan this month, although the wording is not as straightforward as the previous two rate hikes. This shows that against the backdrop of high uncertainty in the Middle East situation and the monetary policy stance of Prime Minister Naoto Kan, Kuroda intends to keep flexible space for future policy operations. Yusuke Miyairi, a foreign exchange strategist at Nomura International, pointed out that Kuroda used similar language in his speech in December last year, and the central bank raised rates that same month. "The Bank of Japan seems to be preparing to raise rates in June as planned." After Kuroda's speech, the USD/JPY briefly fell from the 160 level reached before the speech to around 159.85. Currently, traders estimate an 85% probability of the Bank of Japan raising rates by 25 basis points at the meeting on June 15-16, which means the benchmark rate will increase from 0.75% to 1%, the highest level since 1995. In a survey last month, nearly two-thirds of economists also expected the central bank to act in June. Narrowing internal disagreements, high costs of hesitation Kuroda's statement comes at a time when there is a clear tilt towards hawkishness in the decision-making body of the Bank of Japan. At the April meeting, the central bank voted to keep rates unchanged with a vote of 6 to 3, the largest disagreement during Kuroda's tenure, with three members advocating for a rate hike at the time. Subsequently, two members who had previously supported maintaining the status quo also warned of rising price pressures in recent speeches, indicating support for a rate hike in the short term. Kuroda particularly emphasized the risks of hesitation in his speech. "If the central bank delays necessary action against inflation, it may be forced to raise rates significantly in the future, thereby burdening the economy, markets, and financial system," he also pointed out that raising Japan's still low real interest rates in a timely manner would help market confidence in controlling inflation and curb the disorderly rise in bond yields. Masayuki Nakajima, a senior foreign exchange strategist at Mizuho Bank in London, believes that Kuroda's remarks indicate that the Bank of Japan is now focusing on the risks of lagging behind the situation, shifting from its previous cautious stance to seemingly pay more attention to the risk of inflation rising. Masato Koike, a senior economist at Sompo Institute Plus, directly stated, "Kuroda's tone sounds hawkish and eager for a rate hike, the likelihood of a rate hike in June has significantly increased." Resonating data and external pressures There is increasing evidence that is pushing the Bank of Japan to act swiftly. The wholesale inflation rate in April reached a three-year high, and the speed of cost pass-through by businesses has raised concerns among policymakers. According to the data from Daiwa Securities, food and beverage companies trying to pass on higher input costs are likely to raise prices for more than 10,000 items for the fifth consecutive year. The weakness of the yen has added to the challenges - the conflict in the Middle East has pushed up oil prices, not only suppressing the yen but also disrupting the Fed's policy path. Market even expects the Fed to raise rates before the end of the year, further pressuring the Bank of Japan to narrow the interest rate differential between the two countries to support the domestic currency. Japanese authorities intervened in the currency market between April 28 and May 27, spending 11.73 trillion yen (about 73.5 billion USD), setting a monthly record, but the yen's gains have gradually retreated, exacerbating concerns about sustained input-driven inflation pushing up prices. At the same time, the Japanese cabinet approved a 3.1 trillion yen (about 194 billion USD) spending plan on Wednesday, aimed at providing funds to subsidize households coping with the inflation shock, highlighting the urgency of the decision-making body in addressing rising living costs. At the monetary policy meeting this month, central bank officials will not only decide on interest rates but also discuss whether to continue reducing the bond purchase size by 200 billion yen each quarter in the next fiscal year, which will be another focus of the bond market. Jane Foley, a senior foreign exchange strategist at Rabobank, said, "Although no policy decisions were made today, Kuroda clearly stated that a rate hike this month is worth serious consideration and expressed confidence in Japan's ability to withstand the current shocks. This makes me think that he is likely to support a rate hike this month."