Bank of Japan: Gradual tightening path and neutral rate debate – ING

ING analysts Chris Turner and Padhraic Garvey see the Bank of Japan maintaining its tightening bias after June’s move to 1.00%, with most board members viewing Japan’s neutral rate near 2.00%. While some officials may favour an earlier hike in September or October, ING expects the upcoming decision to leave policy unchanged, with markets watching voting patterns and Governor Ueda’s guidance closely.

Neutral rate seen near two percent

"When raising the policy rate to 1.00% last month, the BoJ retained its tightening bias and concluded that a further removal of monetary accommodation would be required. As always, the timing of such an adjustment would depend on developments in economic activity, prices, and financial conditions."

"Weakness in the yen after the (not unsurprising) ineffectiveness of the BoJ’s FX intervention in April/May this year has led some to speculate that the BoJ will accelerate its tightening cycle. Many of the BoJ board believe that Japan’s neutral policy rate is closer to 2.00% and it’s just a question of how quickly it is taken there."

"Recent source reports suggest some BoJ members could favour the next hike as early as September or October as opposed to the gradual six-monthly schedule of the next hike coming in December."

"As to the decision, anything other than an unchanged 1.00% policy rate would be a surprise. There could be some interest in the voting patterns. Governor Kazuo Ueda is expected to return after a recent illness, bringing the Policy Board back to nine. The focus will be on whether any of the board members will vote for back-to-back hikes. Kajime Nakata did so in January this year and could be a candidate to do so again this week. A bigger surprise would be whether the other two hawks, Junko Nakagawa and Naoki Tamura, join him."

"Governor Ueda’s press conference will be of interest, but unless he hints about the need for a faster tightening cycle, markets look unlikely to react. Remember that representatives of the Cabinet Office attend these meetings and BoJ minutes reflect their views that Japan’s ‘transition to a growth-oriented economy is crucial’. Understandably, investors see the BoJ exposed to more government oversight on monetary policy than many in their G10 central banking peer group."

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