BoJ raised its policy rate to 0.25%

The BoJ surprised us and majority of market participants by raising the policy rate from 0.0-0.1% to 0.25% when the details of JGB purchase reduction (i.e., Quantitative Tightening (QT) was decided this July. We believed that domestic demand, specifically consumption (i.e., spending of households), has been too sluggish to judge that the economic activities are on track of the April Outlook report, which stated "a virtuous cycle from income to spending gradually intensifies." However, the BoJ stated that "private consumption has been resilient despite the impact of price rises and other factors" in their latest Outlook report. The BoJ's meaning of data dependent appears quite varied when compared to other central banks.

Much more hawkish than expected

In addition, we underestimated the Bank's concerns on the JPY depreciation. Our view is that the weak level of JPY (not sharp depreciation(1)) is good for the national income – distribution of the income is the issue at hand, however this is beyond the central banks control. More importantly, we previously believed that Ueda was very cautious to not tighten the financial conditions when underlying inflation, including momentum of the economy, is still not on solid uptrend and the risk of inflation overshooting is limited. In all, we misjudged hawkishness of the BoJ.

We see terminal rate at 1.0%, 1% real GDP growth hard to achieve

We now expect the BoJ to hike the policy rate to 0.5% in October when the next Outlook report would be published, barring unexpected deterioration in the BoJ's Tankan, which appears the most important survey for the Bank to judge the economy and corporate price setting behaviour. A hike in next policy meeting cannot be ruled out. We expect the Bank to pause in December and January to make sure that wage negotiations for FY2025 would deliver another high wage growth in the Spring wage negotiations, at least 5% (3% in base up basis), then a hike in March to 0.75% after seeing the outcome of the negotiations, and June to 1.0%.

Compared to rate market pricing, our BoJ rate projection is higher and the Bloomberg survey to 41 BoJ watchers released on 2nd August shows:

  • 44% expect next rate hike in December
  • 24% (including UBS) expect October, and;
  • 20% in January next year.
  • The median forecast of the terminal rate (end of rate hike cycle) is 1.0% (same as ours), according to the survey.

1. In Japanese, Yen yasu means both weak level of JPY and depreciation, which makes policy argument counterproductive, in our view.

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