BOJ is widely seen as hiking by 25 bps in it's 18th sep meeting. But we believe focus is likely to be on (1) whether there is a 50bp proposal or any dissenting votes; (2) pace of future rate hikes; and (3) adverse effects of rate hikes. We will be watching out for if Policy Board member Hajime Takata proposes a 50bp rate hike. Also how does the BOJ describe its approch to future monetary policy. Markets will be trying to gauge whether there is a strong possibility of a rate hike in Oct. The OIS market is pricing in 1.20 rate hikes by the October 2026 MPM and a total of 1.88 hikes by the December meeting (as of 11th September). To come across as even more hawkish than market expectations, the BOJ would need to signal that it is not ruling out an October hike. But wow that the yen has strengthened to a USD/JPY rate below 155, we see no urgent need for the BOJ to strongly signal consecutive rate hikes. Also on the 50 bps hike theory, we believe unless inflation accelerates substantially (including as a result of renewed yen depreciation) or Japan becomes caught up in a competitive race with the US to raise rates, it would likely be difficult for the BOJ to opt for a larger hike. In our 15th Aug piece titled “BOJ looks set to hike in both Sep & Dec” (https://macro-spectrum.com/opinion/boj-looks-set-to-hike-in-sep-dec-both) we had mentioned BOJ is likely to focus on JPY depreciation led inflation and respond hiking by 50 bps in REMCY26. Terminal rate now looks 2% rather than the previous 1.5% estimates. Takaichi administration & US treasury together will force BOJ to leave it’s dovish stance & focus on real interest rates which are deeply -ve. The BoJ prioritizes the impact of currency fluctuations on inflation and, consequently, on monetary policy (FX -> (Inflation) -> Policy). In contrast, the market is highly focused on the impact of monetary policy on the currency (Policy -> FX). This perception gap could become a source of market instability through the channel of dynamic inconsistency. So, on the policy date, there could be wild swings in JPY and Japanese rates if Ueda is unable to match the current market expectations. But we continue to remain bullish on JPY and see it ending CY26 at 152 levels.
