BOJ still not laying groundwork despite rising expectations of a rate hike
To date, we have forecast that the BOJ will raise rates at next week's monetary policy meeting. We think more people share this view after comments from Digital Transformation Minister Taro Kono and LDP Secretary-General Toshimitsu Motegi raised market expectations of a rate hike. However, the fact that the BOJ has done nothing to lay the groundwork for such a move is a concern.
Ample possibility of both reduced JGB purchases and rate hike
The BOJ says it has shifted to "normal monetary policy" that uses short-term rates as the main policy tool since it ended the large-scale easing program that included negative rates in March. This means that at the upcoming meeting, although the BOJ will decide on the specifics of plans to reduce JGB purchases, which are a carryover from the era of large-scale monetary easing, such moves should not be conflated with actual monetary policy decisions – and indeed should probably not even be considered as the main event. At least in theory, it is incorrect to argue that the major decision of reducing JGB purchases makes it difficult to raise rates at the same time. In fact, Governor Kazuo Ueda said it would be quite possible to do both at the press conference following the previous meeting in June. This suggests the BOJ is ready to base its decision on raising rates on an honest assessment of economic activity and prices.
Conditions still running in line with the BOJ's outlook
At the press conference following the June meeting, Governor Ueda said "If underlying inflation rises toward 2% in line with the Bank's outlook, we will raise the policy rate and adjust the level of monetary easing." He also indicated that inflation trends since the beginning of FY24 had been broadly in line with the BOJ's forecast. Economic indicators released since then also suggest that conditions remain on track with the BOJ's outlook. Some reports have pointed to weakness in spending, but we think this reflects supply-side factors such as rising prices rather than weak demand. Furthermore, Governor Ueda said the BOJ is closely monitoring trends in service prices to maintain the price stability target of 2%, but growth in the services producer price index for June announced by the BOJ on 25 July accelerated to +3.0% YoY. Meanwhile, the Tokyo CPI for July, released on 26 July, showed a slowdown in inflation, but this is also in line with the BOJ's outlook for inflation to slow in the near term. The environment therefore still seems to support the possibility of a rate hike
Risk of moving too slowly
In addition, the next monetary policy meeting is in September, which could clash with the LDP presidential election, and the one following that in October falls just before the US presidential election. The BOJ runs the risk of moving "too late," as noted in the summary of opinions of the June monetary policy meeting, if it decides not to raise rates at this meeting.
