Preview: BOJ expected to stay on hold next week but deliver hawkish signal on June move

BOJ set to hold at 0.75% on 27-28 April but signal June hike readiness. Growth forecasts to be cut, inflation revised up sharply as Iran war energy shock fans second-round price risks.SummaryBOJ widely expected to keep its policy rate on hold at 0.75% at the April 27-28 meetingBoard set to cut its fiscal 2026 growth forecast as surging fuel costs weigh on corporate profitsInflation forecasts to be revised sharply higher as oil-related input costs feed throughBOJ to retain hawkish guidance and stress resolve to continue lifting ratesJune or July rate hike to 1.0% the consensus among economists; nearly two-thirds of Reuters poll respondents back an end-June moveHawks on the board flagging second-round inflation risks as firms increasingly pass on higher costsGovernor Ueda to brief media at 0630 GMT Tuesday following the meetingClosure of the Strait of Hormuz treated as a risk scenario for now, not the BOJ's baselineThe Bank of Japan is widely expected to leave its benchmark interest rate unchanged at 0.75% when its policy board meets on April 27 and 28, but the meeting is shaping up to be anything but routine. With the Iran war driving a significant energy shock and inflation running above the BOJ's 2% target for close to four years, policymakers are expected to use the gathering to lay the groundwork for a rate hike as early as June.Markets have largely priced out any chance of an increase at next week's meeting itself, shifting their attention instead to the BOJ's quarterly outlook report and the post-meeting press conference from Governor Kazuo Ueda, due at 0630 GMT Tuesday. Both are expected to carry a notably hawkish tone.The prevailing view is that the BOJ will stand pat this time but use its communications to keep a June or July move firmly on the table. The key watch point will be the board's updated price forecasts, which are seen as the clearest signal of just how concerned policymakers have become about the inflation outlook.The quarterly report is set to contain two notable revisions. First, the BOJ is expected to cut its growth forecast for fiscal 2026, which began in April, reflecting the drag on corporate profits from surging fuel costs and the disruption flowing from the effective closure of the Strait of Hormuz. Second, and more significantly for rate expectations, the board is likely to revise its inflation projections sharply higher, with rising costs for oil-related raw materials already prompting some firms to consider further price increases.Sources said to be familiar with the BOJ's thinking suggest the board may also tweak its policy guidance language, adjusting the current pledge to raise rates "in accordance with economic and price improvements" to better signal its readiness to act flexibly in the face of war-related inflation risks.A key concern gaining traction within the institution is the risk of second-round effects. While most board members do not yet see a sharp wage-inflation spiral as the base case, hawkish voices have grown louder in calling for vigilance. The fear is that if firms continue to pass higher energy and input costs through to consumers, and if workers begin to demand compensating wage increases in response, the BOJ could find itself well behind the curve and forced into more aggressive tightening down the track.Japan's particular vulnerability to the current shock is worth noting. The country is heavily reliant on oil imports, and the disruption to Strait of Hormuz shipping has hit supply chains and energy costs hard. A stubbornly weak yen has compounded the pressure, adding to import costs and keeping underlying inflation elevated even before the latest round of energy-driven price rises.The BOJ's current baseline, set in January, projected 1.0% growth in fiscal 2026 slowing to 0.8% in 2027, with core inflation reaching 1.9% and 2.0% respectively. Those numbers are now looking dated. Next week's report will also include fiscal 2028 forecasts for the first time, giving markets a fresh read on the BOJ's longer-run thinking. With roughly two-thirds of economists in a recent Reuters poll expecting the policy rate to reach 1.0% by end-June, the direction of travel is clear. The question is simply one of timing and how forcefully Ueda chooses to signal it.For yen and JGB markets, a hawkish hold from the BOJ next week would reinforce the case for further yen strength and upward pressure on the short end of the Japanese yield curve. With nearly two-thirds of economists surveyed by Reuters pencilling in a rate rise to 1.0% by end-June, any dovish surprise would likely be punished swiftly. The broader risk for global markets is that a BOJ tightening cycle running alongside a war-driven energy shock adds a further macro tightening impulse to an already fragile international growth backdrop.