Japan: BoJ to keep policy rate unchanged – Standard Chartered

Experts now see the BoJ raising the base rate in December instead of January to use this window to normalize policy. Economists raise their policy rate forecasts to 0.50% (previously 0.25%) for 2024, and 0.75% (0.50%) for 2025 and 2026. Markets remain vulnerable to a hawkish surprise from the BoJ in Q4, in our view. Analysts see downside risk to their Q4 USD/JPY forecast of 140 due to BoJ hikes and GPIF portfolio rebalancing flows, note Standard Chartered economists Chong Hoon Park and Nicholas Chia.

Road to normalization

“We now expect the Bank of Japan (BoJ) to raise the base rate by 25 basis points in December (from 15 basis points in Q2 and 10 basis points in Q3 2025 previously) to 0.50% by end-2024 (0.25% previously) on the back of stronger-than-expected inflation that has remained above its 2% target for the past 21 months. Wages grew in real terms in June for the first time since March 2022, raising concerns about demand-side inflation. The BoJ may hike earlier to avoid missing an opportunity to normalize policy before dovish pressures come into play from potential 75 basis point Fed rate cuts by end-2024, the risk of a global recession, and a slowdown in China.”

“We also raise our policy rate forecasts to 0.75% in 2025 and 2026 each. We believe the BoJ will hike again by 25 basis points in the fourth quarter of 2025 to continue normalisation, if it sees strong wage growth following the Shunto wage negotiations, as well as a virtuous cycle of demand growth.”

“The BoJ is on a gradual path towards monetary policy normalization. Unlike other major economies, it maintained a dovish stance in 2022 and 2023 even amid high inflation to combat a deflationary mindset. Given that inflation has been persistently high for an extended period around its 2% target, the BoJ is likely to seek to resume its path towards normalization. The positive turnaround in real wage growth in June (1.1% y/y) and July (0.4%) could further boost domestic consumption and consequently inflation. Even with a rate hike in December, Japan’s base rate would still be well below that of other economies, and the Japanese yen (JPY) is likely to remain historically weak even after any rate hike-driven appreciation.”