BOJ’s monetary policy

We expect the Bank of Japan (BoJ) to tighten its monetary policy again this year, with the overnight call rate rising to 0-0.25% from 0-0.1%. Our baseline case is that the BoJ will hike in July, but this is a very close call, especially given the bank’s cautious and opportunistic approach to normalising its monetary policy, meaning the next rate hike could be delayed until October.

We also expect the BoJ to hike beyond this year, with the policy rate gradually approaching the bank’s nominal neutral rate.

The main unknown is whether inflation can be sustained at around 2%. If inflation overshoots, we could see a more aggressive rate-hiking cycle, but if inflation undershoots the cycle could be shallower.