BoJ to keep policy rate on hold – Standard Chartered

Experts now see the BoJ raising the base rate in December from January to use this window to normalize policy. Economists raise their forecasts for policy rates to 0.50% (previously 0.25%) for 2024 and 0.75% (0.50%) for 2025 and 2026. In our view, markets remain vulnerable to a brutal surprise of the BoJ in Q4. Analysts see downside risk to their USD/JPY 140 forecast in Q4 on BoJ hikes and GPIF portfolio change flows, Standard Chartered economists Chong Hoon Park and Nicholas Chia note.

The path to normalization

“We now expect the Bank of Japan (BoJ) to raise the base rate by 25 bps in December (from 15 bps in Q2 and 10 bps in Q3-2025 previously) to 0.50% by the end of 2024 (0.25 % previously) at a stronger than expected level. inflation that has remained above the 2% target for the past 21 months. Wages rose in real terms in June for the first time since March 2022, adding to concerns about demand-side inflation. The BoJ may rise earlier to avoid losing the opportunity to normalize policy before dovish pressures emerge from possible Fed rate cuts of 75bp by the end of 2024, the risk of a global recession and China’s slowdown.”

“We also raise our forecasts for policy rates to 0.75% in 2025 and 2026 each. We believe the BoJ will hike again by 25bp in Q4-2025 to continue normalization if it sees strong wage growth following the Shunto wage negotiations, as well as a virtuous cycle of rising demand.”

“The BoJ is on a gradual path towards normalizing monetary policy. Unlike other major economies, it maintained a dovish stance in 2022 and 2023, even amid high inflation, to combat deflationary sentiment. With inflation sticky and elevated for a prolonged period around its 2% target, the BoJ will likely look to resume its path to normalization. The positive evolution of real wage growth in June (1.1% y/y) and July (0.4%) could further fuel domestic consumption and, consequently, inflation. Even with a rate hike in December, Japan’s base rate would still be well below that of other economies, and the Japanese yen (JPY) is likely to be on the historically weak side even after any given appreciation of the rate increase.”