The BoJ will hold its monetary policy meeting (MPM) on July 30-31. We expect the current monetary policy stance to be maintained. We also believe the inflation forecast for fiscal year 2025 is likely to be revised upward, as inflation data released since the April Outlook Report has exceeded expectations. The strength of the underlying inflation trend is increasing the need for an early interest rate hike by the BoJ. Furthermore, the agreement in tariff negotiations with the U.S. also increases the likelihood of an early rate hike by reducing tariff uncertainty. We expect the next rate hike to occur in October 2025, followed by subsequent hikes in January and July 2026, bringing the policy interest rate to 1.25%. Markets are predicting only 19bps of hike by end CY25 which we believe is a complacent view of BOJ monetary policy. In 2008 when 2 yr JGBs were at current levels of .85, JPY was at 106. Now when 2 yr JGBs are at same levels of .85, JPY is at 147.70. Even if we look at 2 yr UST in 2008, it was at 1.92 levels compared to current 3.92 levels. But even accounting for interest rate differentials, JPY should ideally be under 140 handles. The greatest risk to our forecast of Oct hike is the domestic political situation. But if the BoJ maintains a dovish stance due to political uncertainty and the yen weakens while the government is discussing the cash handouts or tax cuts to combat high prices, the effects of high-price countermeasures will be diminished. This could further amplify negative sentiments towards the ruling LDP. Also the direction of US monetary policy is crucial for shaping up JPY trajectory. Since we expect Fed cutting by 25 bps each in Sep as well as Dec, we remain bullish on JPY to target sub 140 levels by Oct’25.
