JP: Bank of Japan Announcement

Highlights

The Bank of Japan’s nine-member board decided to leave the target for the overnight interest rate at 1% in an 8 to 1 vote but it also vowed to “continue to raise the policy interest rate and adjust the degree of monetary accommodation” in response to developments in growth and inflation. Underlying inflation is nearing the bank’s 2% price stability target and financial conditions are accommodative, it noted. The BOJ has been lifting the policy rate gradually toward a more neutral level estimated to be somewhere above 1%.

Board member Hajime Takata, a former Mizuho Securities executive, called for an immediate rate hike to 1.25%, arguing that the central bank has entered a new phase in which it needs to nimbly respond to upside risks to inflation caused by “demand shocks” from overseas and to changes in overseas financial conditions.

The no change in policy at the July 30-31 meeting was widely expected as the bank is still monitoring the impact of its latest action at the June 15-16 meeting at which it raised the policy rate to 1% from 0.75% in a 7 to 1 vote, citing growing upside risks to inflation triggered by the Mideast conflict. Governor Kazuo Ueda missed the last meeting for medical treatment of a liver cyst infection. Ueda didn’t vote at the June meeting but he submitted his opinions in writing.

Market participants expect the bank to raise rates in October or December, which would be its sixth rate hike in the current cycle that began in March 2024 under Ueda’s leadership to gradually unwind large-scale monetary easing that lasted for about a decade since April 2013.

The BOJ repeated its projection given in its quarterly Outlook Report issued after the April 27-28 meeting that between the second half of fiscal 2026 and fiscal 2027 that ends in March 2028 underlying CPI inflation and the rate of increase in the core CPI (excluding fresh food) should increase gradually and will be “at a level that is generally consistent with the price stability target” and remaining at around that level thereafter.

The median projections by the board the Outlook Report were little changed from the forecasts provided in the April report except for the core CPI annual rate forecast for the current fiscal year ending next March, which was revised down in light of revived electricity and natural gas subsidies aimed at lowering utility bills at the peak of the summer from July to September.

FY26 core CPI (ex-fresh food) +2.5% vs. +2.8% in April
FY27 core CPI (ex-fresh food) +2.4% vs. +2.3%
FY28 core CPI (ex-fresh food) +2.0% vs. +2.0%
FY26 GDP +0.6% vs. +0.5%
FY27 GDP +0.8% vs. +0.7%
FY28 GDP +0.8% vs. +0.8%

In the report, the BOJ said risks to economic growth are “generally balanced,” a slightly more upbeat view than its June assessment that they were “skewed to the downside.” Risks to inflation remains “skewed to the upside.”

Market Consensus Before Announcement

The Bank of Japan’s nine-member board is widely expected to stand pat at its next meeting on July 30-31 after it decided to raise the target for the overnight interest rate to 1% from 0.75% in a 7 to 1 vote in June, citing growing upside risks to inflation triggered by the Mideast conflict. The bank is expected to raise rates further by year-end. The rate hike at the June 15-16 meeting is the fifth in the current cycle that began in March 2024 and part of the gradual process to unwind large-scale monetary easing that lasted for about a decade since April 2013.

For a clearer trend in consumer inflation, BOJ officials are closely watching the bank’s own core measures that exclude the effects of institutional factors (sales tax cuts, energy subsidies, etc.), which are pointing to an uptrend in underlying inflation above the bank’s 2% target.

But the bank is in no hurry to follow up with a back-to-back rate hike as inflation expectations among firms are still around 2% and subsidies and other fiscal measures are expected to continue to offset some of the upward pressures on consumer prices exerted by rising costs of imports due to the weak yen, labor amid widespread worker shortages and transportation and packaging triggered by the Iran war. Bank officials also are looking at downside risks to consumer spending and business investment amid lingering geopolitical risks. The fate of a U.S.-Iran ceasefire remains uncertain, pending the safe reopening of the Strait of Hormuz, the crucial pathway for energy and commodities exports from the Mideast Gulf.

Definition

The Bank of Japan is the central bank of Japan. The Bank of Japan Act states that the bank's monetary policy should be aimed at"achieving price stability, thereby contributing to the sound development of the national economy." The nine-member policy board reviews economic conditions at home and abroad before making a policy decision. There is no specific time for the announcement. The board holds eight two-day Monetary Policy Meetings a year, in January, March, April, June, July, September, October and December. At each meeting, the board votes on the proposals on the bank’s monetary policy stance and the basic guideline on how to achieve the policy target submitted by the chair of the board, who is the bank governor.

Description

The announcement of the bank’s monetary policy decision after each meeting can cause a market reaction, even when there is no change to the policy stance. Markets tend to look ahead toward a policy shift, pricing in a change to the bank’s targets for overnight and long-term interest rates, the pace of financial asset purchases or the scale of market operations.

Market participants closely monitor the news conference by the BoJ governor that usually starts at 1530 JST (0130 EST/0230 EDT/0630 GMT), a few hours after the bank releases its policy decision. Comments from the governor could provide clues to what the bank may or may not do in the near term, which in turn could trigger buying or selling of the yen against the dollar.

Since April 2023, the bank has been conducting a"broad-perspective review" of the costs and benefits of its various monetary easing measures implemented in the past 25 years. The negative overnight interest rate target introduced in January 2016 has been unpopular among lenders as it squeezes their profit margins.

Recommended for you

Upcoming Events