Bank of Japan: Gradual tightening and external shocks – Rabobank

Rabobank’s FX Strategy team reviews Bank of Japan policy, noting that the slow rate-hike pace reflects exceptional shocks such as tariffs, war and domestic political changes. Governor Ueda’s speeches emphasize continued rate increases as activity and prices improve, while higher Oil prices and AI-related demand offset each other. BoJ bond-buying tapering has heightened market focus on fiscal risks and JGB supply.

Rate path, tapering and growth drivers

"Despite this, BoJ Governor Ueda has maintained an optimistic outlook with respect to the progress of positive wage setting behaviour amongst Japanese firms and the momentum that this creates in driving underlying CPI inflation sustainably towards the 2% target."

"In his Christmas Day speech last year, Ueda stated that “in accordance with improvement in economic activity and prices, (the BoJ) will continue to raise the policy interest rate and adjust the degree of monetary accommodation.” In his address last month, Ueda spoke about the temporary depressive impact of higher oil prices on the Japanese economy."

"However, he also referred to the relief that has stemmed from the use of government strategic oil reserves and the AI related demand that is underpinning growth. The combination of these factors has allowed exports and production in Japan to remain broadly flat despite the headwinds coming from higher energy prices and US tariff related uncertainties."

"That said, interest rate differentials are not the only factor weighing on the JPY. The BoJ has been tapering its bond buying programme since 2024 and allowing the size of its balance sheet to fall. This factor has exposed the market to more fiscal concerns and worries about the PM’s expansionary reputation."

"This suggests that more reassurances from the government about the impact of its budget on JGBs are needed."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)