Japan: BoJ still on track to hike rates in Q4 – Standard Chartered

Q2 GDP growth surprised to the upside, which should allay the BoJ’s fears of a sharp growth slowdown. The next 25bps BoJ hike will be in Q4, with risks skewed toward an earlier move in October. Summary of opinions from the July BoJ meeting points to what we think is growing impetus for a hike. Politics remains a potential impediment to BoJ policy normalisation amid calls for PM Ishiba to resign, Standard Chartered's economists Chong Hoon Park and Nicholas Chia report.

Receding uncertainty

"Japan’s Q2 GDP growth surprised to the upside, despite US tariff threats, which should allay the Bank of Japan’s (BoJ)’s fears of a sharp economic growth slowdown. Robust Q2 GDP growth (0.3% q/q) was driven by private capex (+1.3% q/q) and consumption (+0.2% q/q). Net exports contributed 0.3ppt to headline q/q growth, which may reflect export front-loading. Despite a solid H1, we maintain our 2025 growth forecast at 0.8%, as downside growth risks to activity may start to kick in from Q4."

"Our house view is for the next BoJ hike in Q4 with risks skewed towards an October move, while the market is pricing in c.16bps by end-2025. US Treasury Secretary Bessent’s characterisation of the BoJ as being 'behind the curve' may complicate the optics for the BoJ, which may want to avoid the impression that it is raising rates because of overt US pressure. Nevertheless, the summary of opinions from the BoJ’s July meeting points to what we think is growing impetus for a rate hike. Specifically, some board members are in favour of moving away from vague references to 'underlying inflation' due to their opacity, preferring to focus on 'actual inflation' (i.e., core CPI inflation which remains above 3%)."

"Politics remains a potential impediment to BoJ policy normalisation amid calls for PM Ishiba to step down. Polls by NHK News conducted from 9-11 August – days after the LDP plenary – showed that 69% of LDP supporters are in favour of PM Ishiba remaining in his position. This may encourage PM Ishiba to defy his critics and stay put; he may also run for the party presidency in the event a recall election goes through."