Bank of Japan leaves rates unchanged; slows bond sales

Rates remain on pause: At its meeting ending on 17 June, the Bank of Japan (BOJ) decided to keep its policy rate at 0.50%, extending the pause in its hiking cycle from subzero rates that began just over a year ago. The decision was expected by market analysts. The BOJ also said it would halve government bond sales to JPY 200 billion per month from the next fiscal year, a decision also expected by economists.

Trade uncertainty drives decision again: The BOJ said that although it would continue to raise rates ahead, it would not do so for the time being, citing “high uncertainty and downside risks” regarding the impact of trade policies—a reference to Trump’s tariffs—on domestic economic activity and therefore inflation. Regarding the decision to slow its sale of bonds, the BOJ said that it remained committed to reducing its holding of public debt—about 50% of which is owned by the Bank—to reduce dysfunction in the bond market, but a slowdown was needed to avoiding “rapid fluctuations” in yields, whose volatility has recently risen to the highest level in over 20 years.

Consensus Forecast remains unchanged: Our panelists’ forecasts for Japan’s policy rate at the end of this year have remained unchanged since early May. Trade talks remain a major risk, but for now, our panelists see the BOJ raising its policy rate by 25 basis points by December, likely in Q4. This is in line with the BOJ’s forward guidance that it will “continue to raise” its policy rate assuming its outlook for GDP growth and inflation is realized. The BOJ’s next meeting is scheduled for 30–31 July.

Panelist insight: Goldman Sachs analysts said: “We think the BOJ believes a wait-and-see strategy is best from a risk management perspective for the time being, but that there is no change in its stance of gradually raising interest rates as underlying inflation gradually increases.”

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