Japan: BoJ to keep policy rate on hold – Standard Chartered

BoJ to stay on hold on concerns over financial stability, growth momentum and political uncertainty. Experts now see BoJ hiking the base rate in December vs January to use this window to normalise policy. Economists raise their policy rate forecasts to 0.50% (0.25% prior) for 2024, and 0.75% (0.50%) for 2025 and 2026. Markets remain vulnerable to a hawkish surprise by the BoJ in Q4, in our view. Analysts see downside risk to their USD/JPY forecast of 140 in Q4 on BoJ hikes and GPIF portfolio rejig flows, Standard Chartered economists Chong Hoon Park and Nicholas Chia note.

Path to normalisation

“We now expect the Bank of Japan (BoJ) to hike the base rate by 25bps in December (from 15bps in Q2 and 10bps in Q3-2025 prior) to 0.50% by end-2024 (0.25% prior) on stronger-than expected inflation that has stayed above its 2% target for the past 21 months. Wages grew in real terms in June for the first time since March 2022, adding to concerns over demand-side inflation. The BoJ may hike earlier to avoid losing an opportunity to normalise policy before dovish pressures kick in from possible Fed rate cuts of 75bps by end-2024, risk of a global recession and China’s slowdown.”

“We also raise our policy rate forecasts to 0.75% in 2025 and 2026 each. We think the BoJ will hike again by 25bps in Q4-2025 to continue normalisation, if it sees strong wage growth after the Shunto wage negotiations as well as a virtuous demand-growth cycle.”

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