Japan may bring forward timing of next rate hike if inflation remains above target: Economist

Japan may bring forward timing of next rate hike if inflation remains above target: Economist

Well, I think the focus this week um is on inflation both in Japan and in the US if I’m totally frank with you. Um the market is expecting BOJ to remain on hold, but keep in mind that July is when they do their um quarterly revisions. So, we are expecting them to do something on the CPI front. GDP was lower to 0.5% in April. So, they don’t have a lot of pressure to change their GDP growth forecast. But they should admit that inflation is remaining above target. We are still seeing inflation above 3%. It is the bad type of inflation that the Bank of Japan doesn’t want to see, but it is high nonetheless. So, we do think that they’re going to move up from 2.2 to 2.5%. And that is very important for investors because it brings forward the timing for the next BOJ rate hike. Remember, real rates when you account for inflation are still hugely negative in Japan and so there is a need to tighten policy further. This could bring forward that that that deadline. Is there any possibility though that mitigating that timeline that the height could be pushed out due to political uncertainty given that there’s quite the situation going right now in Japan with the prime minister refusing to quit even even amidst intense pressure for him to go there’s intense pressure and also his u approval on ratings has dropped to 20%. So um it remains to be seen um how long he he can stay but of absolutely it is a possibility. We could have the conditions for a rate hike in October. But if that coincides with an election then it is possible that the Bank of Japan will have to push this out to December. But we are expecting 125 basis point rate hike before the end of the year either in October or in December depending on what happens with inflation and of course all of the election uncertainty. Well, what about the yen then? How does the yen behave in this environment given that we have seen some increased volatility of late? Well, the the backdrop is broader US dollar weakening and so you are going to see strengthening across the board in Asia and including for the JPY. Investors have to repric BOJ action a little bit. Um, and given that they’ve been so slow, so incremental, and there is this political uncertainty to factor in, we think that the pace of yen appreciation is going to likely be more gradual than expected. So, we’ve recently revised down our forecast from uh 135 to 140. If you look at the consensus, um, it you know, market is still expecting yen to appreciate more than that. Um so I think we are going to see some repricing and we are going to see more gradual pace of y appreciation following from that BOJ intervention that may take place in October or or in December.

Carlos Casanova says inflation and the domestic political uncertainty in Japan may affect the timing of Bank of Japan’s decision to hike rates, but still expects a 25 basis point hike by the end of 2025. He also says the pace of yen appreciation is going to likely be more gradual than expected.