The Danske Research Team highlights that the Bank of Japan (BoJ) may be considering a near-term rate hike in response to mounting cost pressures, despite signs of slowing economic momentum in Japan. According to the May flash Purchasing Managers' Index (PMI) data, Japan's manufacturing sector remained in expansion but experienced slower growth, with firms stockpiling due to supply disruptions related to the Middle East and rising costs. The services sector stagnated, ending over a year of continuous growth, while input prices increased at the fastest pace since 2022. Firms raised selling prices at a record rate, though these increases still lagged behind cost inflation, indicating mounting pressure on profit margins and rising downside risks to Japan's economic recovery [1].
BoJ policymaker Koeda has indicated that another rate hike could occur as early as the 15-16 June meeting if cost pressures remain elevated and economic growth persists. This stance has helped keep the Japanese Yen supported in the market. Additionally, upcoming countrywide CPI inflation data is expected to provide further insight, with Tokyo data suggesting that headline inflation (excluding fresh food) declined in April to 1.8% from March, as government subsidies have shielded consumers from higher oil prices [1].
Danske Bank notes that, unlike other central banks, greater certainty in energy markets could actually increase the likelihood of a near-term rate hike from the BoJ. This is due to the unique dynamics of Japan's inflation and cost structure, where energy price stability may embolden the central bank to act sooner rather than later [1].
CONCLUSION
The Bank of Japan is signaling a possible rate hike as early as June, driven by persistent cost pressures and inflation dynamics, despite signs of slowing growth. Market participants are watching upcoming inflation data and BoJ communications closely, as policy decisions could impact the Yen and broader market sentiment.