Patience is a virtue: Bank of Japan holds steady

Summary

• In a widely expected decision, the Bank of Japan (BoJ) held its policy rate at 0.50% at this week's meeting. Uncertainty around trade policy appears to be a key factor that kept BoJ policymakers on the sidelines this month, and dovish-leaning elements of the decision and updated economic forecasts suggest this rate pause may extend for a bit longer.

• In its updated projections, the BoJ downwardly revised its GDP growth and underlying inflation forecasts for fiscal years 2025 and 2026, and noted that risks for both economic activity and prices remain skewed to the downside. The central bank now sees the 2% inflation target being reached in FY2027 instead of FY2026. Comments from Governor Ueda were somewhat mixed, as he noted that a delay in the achievement of the price target does not necessarily mean a delay in rate hikes.

• Given this mix of a somewhat dovish-leaning policymaker stance, elevated uncertainty, but also recent encouraging wage and price growth data and our own more-optimistic view of GDP growth, we do forecast another BoJ rate hike, though expect it to now come later than we previously anticipated. We see the BoJ hiking its policy rate by 25 bps to 0.75% in October of this year. By that point, we suspect that policymakers will have more clarity around global trade policy and local economic growth and inflation developments.

• We see a gradual pace of yen appreciation against the dollar this year as the BoJ hikes while the Fed is cutting rates. However, around the turn of the year when the Fed concludes its easing cycle, U.S. growth improves and the BoJ is on hold, we expect to see renewed yen weakening against the dollar through late 2026.

Read The Full Article