The Bank of Japan kept interest rates unchanged at 0.50 percent on Friday and said it needed more evidence of sustained economic expansion before raising them further, sending the yen to a new 4-1/2-year low. "To change our policy we need to be more convinced about the economic outlook," the central bank's governor, Toshihiko Fukui, told a news conference.
Fukui said he had no preconceived ideas on whether the BoJ should raise rates in July or at any particular time in the future. His comments dampened speculation of a rate hike in July, with swap markets pricing in about 25 percent chance of a rate hike then, compared with 35 percent before the BoJ meeting. Earlier in the day, the central bank's Policy Board voted unanimously to keep rates unchanged.
The lack of any proposal for a rate hike from the bank's nine board members, though widely expected, also soothed fears of Japanese bond market players that such a call would stoke speculation of a move at the board's next meeting on July 11-12. But many in the markets are still expecting the BoJ to raise its overnight call rate target to 0.75 percent from the current 0.5 percent at its August 22-23 meeting.
By then, the BoJ will have seen economic growth figures for the April-June quarter due in mid-August and can also avoid raising rates just before an upper house election, currently expected in late July unless parliament extends its current session.
A Reuters poll taken after Fukui's news conference showed 36 of 60 market players expect a rate hike in August. Markets are also fully pricing in a rate hike by September. Fukui reiterated the bank's stance that it will gradually raise rates, keeping pace with improvements in the economy and prices.