Japan: Central Bank raises interest rates in July
Latest bank decision: At its meeting on 31 July, the Central Bank raised the policy rate to 0.25% from 0.00–0.10%. In addition, the Bank revealed plans to halve its bond purchases.
Monetary policy drivers: Headline and core inflation continue to run above the 2% target and have accelerated so far this year. This, coupled with a weak yen and rising wage pressures, likely persuaded the Bank to hike.
Policy outlook: The Central Bank indicated that it would likely continue to raise the policy interest rate going forward. That said, the Bank is set to proceed cautiously, and our Consensus is for only mild monetary tightening by the end of this year.
Panelist insight: On the outlook, Nomura analysts said:
“In our new main scenario, the BOJ implements another rate hike at the April 2025 MPM (30 April-1 May) by raising the policy rate from 0.25% to 0.50%. This scenario corresponds to the case where the BOJ further increases its confidence in a virtuous cycle between wages and prices based on next year’s shunto (spring wage negotiations).”
United Overseas Bank’s Alvin Liew sees the next hike coming sooner:
“We now expect the BOJ to stay on the rate tightening trajectory although it may not be a continuous cycle and likely to be a limited normalisation path. We expect BOJ to keep its policy rates unchanged in the next Sep 2024 MPM, and the next hike may come in 4Q24, via a 25-bps hike to 0.50% which we believe will be the terminal rate.”