Mount Fuji, Japan

Japan Monetary Policy June 2024

Japan: BOJ disappoints investors with vague bond move in June

At its meeting on 14 June, the Bank of Japan (BOJ) unanimously decided to keep the policy rate at 0.00–0.10%. The decision was expected by the market. Meanwhile, the BOJ took a slightly more dovish-than-expected decision with regard to Japanese government bonds, promising to cut purchases but refusing to specify when or by how much until its next meeting in July. This unnerved investors and led the yen to approach the 34-year low reached in April.

In making its decision, the BOJ said that it expected underlying inflation to gradually rise in the medium term to a level consistent with its 2.0% target, supported by a narrowing output gap and an increase in inflation expectations as a “virtuous cycle” between wages and prices continued.

In a post-decision press conference, BOJ Governor Kazuo Ueda said that there is a “possibility” that the BOJ could raise rates in July “depending on the economic and price [data] that become available at the time.” Nominal wages rose at the fastest pace in 10 months in April, helping to support the demand-driven price pressures that the BOJ sees as crucial for it to sustainably lift Japan out of its decades-long deflation. However, our panel is divided on when the BOJ will next raise rates, with some seeing hikes in Q3 and others seeing the BOJ waiting until Q4 or beyond.

ING’s Min Joo Kang and Chris Turner commented:

“With wage growth expected to be solid from May onwards, there is also a good chance that demand driven inflation will pick up, which is what the BoJ needs to see. We expect inflation, wage, and consumption conditions to drive a rate hike in July.”

Frederic Neumann and Jun Takazawa, economists at HSBC, said:

“While we expect the degree of monetary accommodation to be reduced over the course of 2024 and 2025, the absolute stance of the central bank will likely remain easy. Our rate path sees the policy rate reach 0.75% by end-2025 relative to a neutral, nominal policy rate of around 1.5%. The BoJ’s JGB [Japanese government bond] holdings, while set to decline, is expected to remain sizeable at well over JPY500trn through our forecast horizon, leaving a major anchor on JGB yields.”

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