Why This Economist Thinks Bank Of Japan Will Hike Rates This Month And Again In October

(RTTNews) - The Bank of Japan Board, led by Governor Kazuo Ueda, is set to hold its latest policy session on July 30-31 and an economist at Capital Economics expects the central bank to hike interest rates by 20 basis points as soon as this month and deliver another similar one in October this year.

The Japanese central bank has pledged that it will keep tightening policy if inflation evolves as expected, Marcel Thieliant, head of Asia-Pacific research at the London-based research firm, said in a note last week.

The economist expects the Bank of Japan to trim its monthly bond purchases to 2 trillion yen by mid-2026, with an initial reduction to 5 trillion yen to be unveiled this month.

Capital Economics expects the 10-year Japanese government bond yield to rise to 2.5 percent by 2030, based on the view that the BoJ will eventually lift its policy rate to 2 percent.

In March, the BoJ had raised its interest rates for the first time in 17 years and became the world's last central bank to end negative rates amid signs that inflation is strengthening.

The central bank had also decided to end its yield curve control, or YCC, policy that capped the interest on the 10-year JGBs around zero.

The central bank is widely expected to leave rates unchanged in July and wait until September or October to hike them.

One of the three reasons why the BoJ would want to keep rates unchanged this month is the slump in the economic output that has reportedly prompted some policymakers to seek more evidence of a revival in consumption before hiking rates, Thieliant said.

The second reason is a rebound in the yen, from the fresh lows plumbed after the June policy session, has made it quite a bit strong.

"Third, the Bank's typically cautious approach would argue against lifting the policy rate alongside any reduction in bond purchases," Thieliant said.

"Nonetheless, we still consider it more likely than not that the Bank will hike its policy rate to 0.3 percent at the upcoming meeting."

The economy now is on the mend and there are signs of a rebound in consumption, Thieliant added.

The BoJ Board is set to keep inflation forecasts broadly unchanged at the upcoming meeting, the economist pointed out citing press reports, as several policymakers are of the opinion that the weaker yen creates upside risks to inflation.

While Capital Economics' projection that the BoJ policy rate will reach 0.5 percent by the end of next year is essentially the same as that of other analysts, the difference is in the expected timing of rate hikes.

Nearly all other analysts expect the BoJ to hike rates once this year and once next year, whereas the firm has forecast two rate hikes this year, with the second one coming in October, but no move next year, the economist said.

"As the Fed starts to loosen monetary policy, we expect the yen to strengthen in earnest against the dollar, which should finally take the heat out of goods inflation," Thieliant said.

"And with inflation set to slow a touch this year relative to last, we think that trade unions will push for slightly smaller pay hikes in next year's Shunto [annual wage negotiations in spring]."

"With underlying inflation set to fall below 2 percent next year, the window for policy tightening will close," the economist added.