At the monetary policy meeting held on 15-16 June, the BoJ raised the policy rate from 0.75% to 1%, the highest level since 1995, as expected. In its interim assessment of QT, it also decided to halt reductions to its JGB purchases from FY27 onward, after which monthly purchases will be maintained at around JPY2trn. This can be seen as a balanced choice vis-à-vis the Takaichi administration, which is reluctant to raise rates and concerned about a surge in long-term yields. Markets are currently pricing in a 92% chance of a 25 bps hike by Dec'26. We believe there is a significant risk of the next hike being in October itself. Governor Uchida characterized the current rate hikes as “policy adjustments toward a neutral level”, while adding that “it is not clear at what point we can judge the stance to be neutral; we won’t know until we reach it”. This likely implies that, although the policy rate has now reached the lower bound of the BoJ’s published estimates of the neutral rate, that fact does not mean the Bank will become materially more cautious about further rate hikes. As the situation in the Middle East seems to be stabilising, we believe uncertainty over the economy should recede, and the BoJ should ideally become even more focused on upside risks to inflation. In recent years, firms have become more accustomed to passing higher costs on to prices, and the BoJ should be strongly alert to the possibility that the mechanism through which higher crude oil prices lead to higher inflation has strengthened compared with the past. However, the rate-hike path could be affected by domestic and overseas political developments. In particular, if BoJ leadership proposes additional rate hikes going forward, we believe dissenting votes are likely to rise to four out of nine by July 2027, assuming PM Takaichi nominates doves to replace the Policy Board members whose terms expire on her watch. At the time of the September monetary policy meeting the BOJ will only have lending data for August, the first month when a June rate hike will start to be reflected in market interest rates and will not have any results from a Tankan survey carried out after the rate hike. As of September, the BOJ is unlikely to have enough data to assess financial conditions following a June rate hike. At the October meeting, however, when it will have access to lending data for several months following a June rate hike as well as to the results of the September Tankan survey, it will probably be able to conclude that funding conditions remain accommodative. But historically BOJ had decided not to hike rates in October 2025 or April 2026, we think it will be fairly difficult for the current leadership team to: (1) justify a rate hike after a shorter interval than before (2) without being able to confirm employers' stance on wage hikes. Hence, our main scenario for the next rate hike following a hike in June is a hike in December, while our risk scenario is a hike in October.
