JPMorgan's Japan economic research team has recently issued a report forecasting the potential actions at the Bank of Japan's upcoming monetary policy meeting. The core view is that the threshold for the BoJ to deliver a hawkish signal through a rate hike is extremely high. Even if it raises rates as expected, and adjusts its government bond purchase tapering policy, the overall policy stance is likely to remain dovish.
The bank believes the BoJ is highly likely to raise its policy rate by 25 basis points to 1.0% at next week's meeting. In April, uncertainties stemming from the Middle East geopolitical conflict led the BoJ to keep rates unchanged, and these uncertainties have not yet fully dissipated. However, recent economic data and various indicators show that the Japanese economy is resilient, and upside risks to inflation are intensifying.
Current monetary policy in Japan remains in an accommodative zone. Persisting with a wait-and-see approach could instead negatively impact the economy and markets. Therefore, there is unlikely to be explicit opposition to a rate hike from within the BoJ's policy board or from the Japanese government.
Key Focus Areas for the Meeting
The key points of focus for this meeting are, first, the BoJ's communication regarding the "future path of interest rates" following the hike, and second, the results of its assessment of the Japanese Government Bond (JGB) purchase plan. Market concerns are growing that the BoJ's policy actions are lagging behind economic conditions.
The BoJ will likely attempt to send a somewhat hawkish signal to alleviate these market concerns; Governor Kazuo Ueda may also mention the possibility of further rate hikes in the future during his press conference. However, as the market has already priced in expectations for subsequent tightening, it will be very difficult for the central bank to create a significantly hawkish impact through its messaging alone.
The High Bar for a Hawkish Surprise
To deliver a hawkish surprise that exceeds expectations, the BoJ would need to signal one of two things: either an acceleration in the pace of tightening, or a commitment to raise rates above 2% (exceeding the neutral rate level). Based on the current situation, such scenarios are considered low-probability risk events.
Assessment of Quantitative Tightening (QT)
Regarding the assessment of quantitative tightening (QT), the current tapering plan, which runs until March 2027, is likely to be maintained. This means keeping the quarterly reduction in bond purchases at 200 billion yen, with monthly purchases falling to 2.1 trillion yen. Market focus is concentrated on the JGB purchase plan for the period after April 2027.
JPMorgan had previously considered it reasonable to slow the quarterly tapering pace to 100 billion yen, balancing the goal of normalizing the balance sheet with the current supply and demand conditions in the JGB market. However, media reports this week suggest the BoJ may consider pausing the tapering operation after April 2027, maintaining the monthly JGB purchase amount at 2.1 trillion yen, effectively keeping the QT pace unchanged.
If this information is accurate, this policy adjustment would be significant. A recent summary of market participant views published by the BoJ shows divergent opinions, but overall, voices supporting continued tapering hold a slight edge. Against this backdrop, if the BoJ decides to pause tapering, it could be interpreted as aligning with the policy direction of the Kamikawa cabinet, which is increasingly shifting towards a more expansionary fiscal policy.
Policy Divergence and Global Challenges
The market has already detected a policy divergence between the BoJ and the Kamikawa cabinet in the process of monetary policy normalization. The Middle East conflict, which has pushed up global inflation, has further complicated the BoJ's policy calibration. Governor Ueda previously stated that when core inflation reaches 2%, the policy rate should also enter the neutral rate range. However, due to global uncertainties, the central bank has not acted according to this line of thinking.
Currently, Japan's core inflation rate (excluding fresh food and special factors) is approaching 3%, and the market widely believes the underlying inflation level has already exceeded 2%. Even if a rate hike occurs as expected, the policy rate would only rise to 1.0%, just reaching the lower bound of the BoJ's estimated neutral rate range. The central bank itself acknowledges that the prolonged accommodative policy environment may have caused a downward bias in the neutral rate.
Conclusion: Dovish Tilt Expected
In summary, even if the Bank of Japan implements a rate hike, if it simultaneously announces a pause in JGB tapering as recent media reports suggest, the market will likely still judge the overall stance of this meeting as dovish.
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